Dixon Advisory has extensive experience in providing expert investment advice and investing in all types of markets. Our Investment Advisors have helped many people whove made investment mistakes including investors who hold on to sliding shares in the hope of recovering a significant loss to those looking for an investment that offers a large return without any risk. Here they share their advice on how to avoid 10 common investment pitfalls.

(1) Chasing performance

When an asset is performing well, excessively favouring that asset over others can be detrimental to the rest of your portfolio. And theres no guarantee the performance will continue.

Recommendation: Dont chase returns. Look at the amount you have invested rather than the price because if the asset is over-valued, a continual rise in price may not be sustainable. Consider performance over the long term and look at the investment as part of a diversified portfolio.

Remedy: Rebalance to the desired benchmark weight. For a share that has performed well, sell down to the orginal position size. For example, if a share doubles in price, bring it back to half the value of the original investment.

(2) Being overweight in speculative assets

Even people who are quite conservative in their everyday lives can show a riskier side when theyre investing. Some get a tip about a particular speculative share and have dollars signs in their eyes.

Recommendation/remedy: Keep the speculative assets to a small proportion of the portfolio (around 5 per cent for someone close to retirement) and only invest as much as you can afford to lose. Be prepared for much higher volatility than is typical for other assets in your portfolio. It is often useful to treat speculative assets as a sub-portfolio to be viewed collectively, for example, five 1% speculative holdings comprise the sub-portfolio, then view the performance of the sub-portfolio rather than individual positions. This should reduce the observation of volatility in the speculative part of your portfolio.

(3) Not taking into account your needs for your stage of life

Being too aggressive close to retirement or too conservative at a young age can both be pitfalls. For example, when your super is in retirement phase, you need assets that can provide a regular income stream and capital stability. At the other end, by playing it too safe at a young age, you may miss out on opportunities to make significant capital gains.

Recommendation: Structure your investment portfolio according to your circumstances and needs for your stage in life.

Remedy: Seek professional financial and investment advice to address inappropriate risk for your personal situation. If youre nearing retirement, sell down the riskier assets.

(4) Diversifying too much or not enough

Investing in only one or two asset classes could result in significant losses to your overall portfolio should those assets drop in value.

Recommendation: Diversify across asset classes, not just within asset classes, to help manage the risk/return characteristics of your portfolio.

Remedy: Seek professional investment advice to develop an appropriately diversified portfolio which suits your needs and circumstances.

(5) Investing in shares of companies you know nothing about

A share is not just a price, its part ownership of a company. Some investors buy shares without knowing what the company does, whos behind it, how it operates or how effective it is.

Recommendation: Take a leaf from the book of the worlds best investors who only invest when they understand sufficiently what they are investing in.

Remedy: When looking at a company, ensure you understand what it does and assess the prospects for that business sector. Its also important to feel confident that the company can deliver the results you seek as an investor including:

• being able to maintain/improve the competitive position of the company within the sector
• having a financial structure that can be managed in a way that is consistent with the goals of the business
• being able to meet the needs of shareholders, such as having a dividend policy.

(6) Over-reacting to negative news about the markets

News headlines about billions being wiped off the markets in a day create fear and hysteria in everyday investors, some of whom make knee-jerk reactions based on very little information.

Recommendation: Unless you day-trade stocks, you dont need to watch the daily movements in the markets. Try to tune out of the hype and rely on credible advice from experienced professionals who are trained in analysing the information and looking at the longer term. Remember, markets going down is normal. When you watch the markets on a daily basis, all you can observe is volatility, not performance.

Remedy: If youre nervous about what youre hearing in the media, talk to your advisor for some perspective and discuss options for adjusting your investments if necessary.

(7) Having unrealistic expectations

Expecting that your advisor will source an investment with a 12 per cent return risk free is not realistic. Believe it or not, this was a real request of one of our advisors.

Since 1900, Australian equities have returned 11.3% in nominal terms and 7.2% per annum adjusted for inflation, while government bonds have achieved annual returns of 5.5% in nominal terms, 1.6% inflation adjusted and shorter term government bills just 4.5% nominal and 0.7% inflation adjusted. It is the return of government issued bills that equates to the risk-free rate of return. The higher rate of returns achieved by longer dated government bonds and equities reflect increased levels of risk associated with those investments.

Recommendation/remedy: Discuss your needs and goals with an investment advisor and find out what is achievable according to your risk profile and under current circumstances. In the initial meetings, it is highly important to communicate clearly what you are looking to achieve and discuss with your advisor if it is plausible.

(8) Getting emotionally involved in your investments

Its not easy to crystalise a loss. But holding on to a continually poor performing investment for sentimental reasons or in the hope that it will bounce back, even though all the indications show the opposite, is not advisable.

Recommendation: Leave your emotions out of your investment decisions. Cut your losses if your original reason for investing has been compromised. However, if your investment thesis is still valid, then bring your position back to the original holding size. Always ask yourself: Would I buy this stock today? If the answer is No, sell!

Remedy: A professional investment advisor is impartial and will provide advice based on your personal circumstances, your risk profile and market conditions. Find an advisor you trust so when its time to make hard decisions youre open to advice.

(9) Not setting goals or knowing when to sell your assets

Getting addicted to the rush of an investment increasing in value can result in not knowing when to walk away. You might see your investment increase by, say, 50 per cent and then you move the goal posts and wait for it to go higher, only to find the opposite happens.

Recommendation: Set a goal for your assets and be committed to selling when you achieve the target share price or dividend payout.

Remedy: Seek objective advice about whats reasonable and to identify the trigger to alert you to when its time to sell or reduce positions.

(10) Not accepting and building from investment mistakes

Leaping from a poor investment to a new investment without reviewing what went wrong can lead to making the same mistake all over again.

Recommendation/Remedy: Take time to analyse the failure of any investments. If its still not clear what went wrong, you probably should not have been initially invested in to the company. Write down your reasons for investing at the time of investment. This becomes a useful counter-measure to our natural tendency to re-write history as time passes.

Please note that past performance is not a reliable indicator of future performance.

Contact us about investing.