Punting pitfalls: five errors to avoid when investing
Experts expose the most common errors made by ordinary investors - and how to avoid them
WHAT are the most common investment mistakes made by ordinary investors? The Sunday Times asked a posse of experts to shed light.
Backing yesterday's winners: "Almost always a big mistake," says Darius McDermott of Chelsea Financial Services. For example, in 2011 UK index-linked gilts were the best-performing sector, returning 18 per cent. Last year, this sector was the worst (up just 0.09 per cent), illustrating the peril of simply following fashions.
Buying expensive stocks: It's crucial to look closely at valuations, says John Chatfeild-Roberts of Jupiter Asset Management. "When things are cheap, the downside risk is small. When things are expensive, the opposite is true." Never invest in a stock without checking out the price/earnings ratio – a useful measure of its value. The lower the number, the cheaper it is.
Ignoring dividends: Shares in high-yielding companies aren't "as exciting as those with the potential for high and fast growth", says Danny Cox of Hargreaves Lansdown. But never underestimate the compounding power of reinvesting your dividends. A £10,000 investment in the Invesco Perpetual High Income fund 10 years ago, would have grown to £37,231 by reinvesting dividends, but to only £26,268 if the dividends were taken as income.
Failing to secure an exit: Illiquidity is the great enemy of investors, says Thomas Becket of Psigma Investment Management. Just ask anyone who got trapped in commercial property funds in 2008. Before investing, always think about whether you'll be able to sell if you need to. Never hold more than 10 per cent of your portfolio in assets that might prove illiquid.
Trying to time markets: Timing the markets is a mug's game, particularly given current volatile conditions, says Caspar Rock of Architas. You can lessen the risk by drip-feeding money into the market via a fund at regular intervals. "This smooths out the highs and lows in share prices."
This article appears in the 7 June 2013 edition of The Week.