Many investors fail to make the most of their savings and investments. An analysis of private investor behaviour reveals some common mistakes, which if avoided could lead to better outcomes:-

1.     Seeking the unknown

Trying to find the Holy Grail of ‘the best place to invest this year’, instead of focusing on long term returns relative to your own objectives. No-one knows what the best asset class, market, sector or individual shares, bonds or other investments will be in the short term.   Any adviser who tells you they do should be avoided.

2.    Investing after the event

Investing in whatever turned out to be the best asset class, market or sector last year. The problem with this approach is that by the time it is apparent which investments produce the best returns, the price of buying them has already gone up. The best investment of last year can quickly become the worst investment this year. Short term past performance is a poor guide to future returns.

3.     Peer pressure

Listening to friends who tell you how much money they made last year on their best investment decisions and then following them into those investments. This leads to buying into investments that may not be suitable for your own needs in terms of risk taking, liquidity of the investment, income yield or tax treatment.

4.    Letting the tax tail wag the investment dog.

If you are a taxpayer, then saving tax on your investments will be important but avoiding tax on a profit can lead to poor investment decisions. For example, restricting realisation of gains to the tax free allowance of £11,000 will avoid capital gains tax, but if the investment then falls by more than the tax due, taking a bigger taxable profit would have been a better option. Similarly, investing in tax incentivised savings such as venture capital trusts or AIM shares should only be considered alongside the additional risk of loss entailed in these higher risk investments.

5.    Being reactive.

This may be in relation to events, which then lead you to become too heavily invested in one sector or stock. Short term price adjustments rarely give rise to profits over the longer term and trying to make a quick profit is difficult for private investors to achieve as institutional investors are usually able to move more quickly in and out of short term positions.

6.    Gearing your investments by borrowing to invest.

While this may compound a gain it will also compound losses and leave you with a debt to pay off.

7.    Comparing apples with pears.

A frequent complaint is that cash based savings pay little interest compared to stock market dividends in return. When comparing investments always consider the margin of risk over the risk free return compared to the degree of risk you can afford to take.   Higher returns usually mean a higher risk of loss too and require locking up your money for longer.

8.    Managing currency risk

When investing abroad, there is danger in not separating the currency risk from the investment risk. Holders of foreign investments often fail to appreciate that they can sell the investment without ditching the currency and instead hold on to potential profits while waiting for the currency to adjust, only to see their investment gains evaporate.   If you have overseas investments then hold a foreign currency cash account too so that gains and dividends can be converted over time.

9. Not looking at the whole

Making decisions piecemeal about each investment owned rather than looking at all savings and investments on a coherent basis. Different investments often have different features such as permitted investments, risk of loss, income options, tax treatment etc.  You need to understand your overall asset allocation and liquidity in order to manage the risk taken in relation to your capacity for loss.  By making piecemeal decisions you can end up with a series of investments that do not optimise your needs

10. Not having a financial plan.

You need one that looks at your total assets, liabilities, short and long term cash flows, tax status, income and capital needs, yields required in relation to risk adjusted returns.

By investing in such a plan and then making your investment decisions fit around it you may achieve better outcomes and will be able to use it as a framework to make future investment decisions. Ultimately good investment outcomes are about having the money you need to support your lifestyle and aspirations; this should be your focus, rather than short term profit.