How to avoid common investment mistakes when getting started

1. Not starting to invest

Investing can seem out of touch if you don't have a huge amount of money to get started, but the earlier you can get started, the faster the magic of compounding will take place.

Waiting 'one more year' in the grand scheme of things doesn't seem like a long period of time, but it can yield significantly different outcomes.

Let's imagine this year you invest £2500 and continue to do this every year for 29 years, and there is an annual growth rate of 6.5%. By the end of 2050, you would have £217,022.

Now let's say you started just one year later by 2050 you would have £15,505 less. Just from one year with a total of £201,417.07.

Time matters start today. Even if you only have a £1 to invest.

2. Trying to time the market

It's almost impossible to perfectly time the market. Everyone wants to buy when the price is low and sell high, but that's not always possible. If you are investing for the long term, this shouldn't worry you as you have time on your side.

On average global equity, returns have increased 5.2% and its even better at 6.5% (after inflation) if you're looking at the US performance for the last 120 years.

It's easy to invest when the market is rising, and it seems like it will never end. It's hard to invest when things are in free fall, but you must. Through every past crisis, tragedy and disaster, the markets have come out on top in the long run.

On these days the market crashed (16 day period)

The end of the gold standard (1931): - 26.7%
World War II (1940) : -24.6%
Post World War II demand shock (1946): -24.6%
Black Monday (1987) -31.3%
The dot com bubble (2002): -19.3%
The Great Financial Crisis (2009): - 13.8%

After every single down market since the 1930s, there has been a significant recovery averaging 70.95%.

And more recently…

Covid-19 (2020): -20.7%

Do we expect this to buck the trend? I'm betting no. The reason is simple. Humans are always striving for progress. There will be economic downturns, but we will always come back stronger.

Looking at the US S&P return (The top 500 market cap companies) you can see that the average bull market period lasted 6.6 years with average average cumulative returns of 339%. In contrast the bear market was 1.3 years with average cumulative loss of 36%.

You are better in the market than out. Time is your friend.

S&P 500 Index Bull vs Bear Market from 1926 to 2020 (Source)

3. Paying for high fee investment products

Small fees don't seem to matter in the beginning, but over a long period they can make or break your investment returns. The issue of fees is not just the money that you pay but the loss of the compounding effect.

Let's imagine that two people who have the same initial capital make two different investment choices.

Person A - Invested £100,000 in an index fund with an annual fee of 0.22%

Person B - Invested £100,000 in a mutual fund with an annual fee of 2%

Over 20 years, both investment products return on average, 6.5%.

Person A would have made £238,086, and the fund would be worth £338,086 with £14,275 lost in fees.

Person B would have made £141,175, and the fund total would be worth £241,175 with £111,187 lost in fees!

That small 2% will account for a difference in returns of over 33% difference to the total value over 20 years!

4. Not diversifying

It can be tempting to invest in a single share, sector, geographic location or asset class over time as you believe it will over perform over time. However, this dramatically increases your risk. You might be 'right' for a small period, but in the long run, you can be sure that your luck will run out.

Let's say its the late 1990s and you're on the cusp of the internet revolution, and you want to invest in the newest internet tech growth companies. Take a look at these companies: (Founded 1996)  - Defunct 2001 (Founded 1999) - Defunct 2000 (Founded 1998) - Defunct 2000 (Founded 1995) - Defunct 2008 (Founded 1994) - Market Cap $1.22 trillion

Spot the outliner…

Now imagine that this list is 100 times bigger and only about 2 or 3 companies make it. Your odds of correctly identifying the winning company are very slim, a needle in a haystack. Betting big on a single winner is not investing. It's gambling. You need smart asset allocation to achieve your investment goals.

5. Not being patient

"Good things take time."

It's an almost universal phrase that applies aptly to good investing as well. Time is your friend when investing, and you need to use patience to see the returns that you want.

Buying and selling every day or week is not investing. You're trading. Being the longer-term investor means that you need to be in for the long haul. Have conviction in your investment decisions. Remember why you invested in them in the first place.  

It takes time for great management teams, strong leadership, and network effects to take place. You buying and selling every week will reduce your overall returns through fees and being out of the market on the best days.

Of course, you should assess your holdings over time. You might decide to sell them, but this should be a structured thought out process, not within the first weeks or months of holding the investment.