Six common investing errors and how to avoid them

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Tim Bennett, Head of Education at Killik & Co, who through Killik Explains, aims to help individuals better understand their financial situations and how to take control of it. “Successful investing helps to deliver the financial answer to one of life’s most fundamental questions: what do we want to achieve?” he commented.

Not diversifying a portfolio

“No stock is immune from single stock risk,” he explained.

One of the largest stocks on the UK equity market until 2010 was BP, but after the Deepwater oil spill dividends tanked in a big way.

“This episode reveals that no firm is too big to fail and underlines the importance of diversifying by spreading your money around different investments to help to mitigate the impact of one suddenly running into short-term trouble.

“Opinions vary on how many stocks you should hold as a minimum – at least 20–25 will significantly reduce single stock risk,” he added.

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Spending dividends

“Dividends are attractive because they provide a short-term, known cash return on your investment.

“However, to help you to build long-term stock market wealth you should reinvest them in more shares, as they are declared and distributed, rather than spending them.

“Several well-known surveys of stock market performance suggest that this approach can add significantly to your long-term total returns,” Mr Bennett commented.

Being ruled by emotion

It can be difficult not to shed a tear while watching your investments fall, but rational, objective decision-making is needed to successfully invest.

As Mr Bennett explained: “As humans, we are often irrational and are prone to being ruled more by our hearts than our heads.

“People sometimes buy low priced ‘penny’ shares in the belief that they ‘can’t get any cheaper’.

“Yet any share, even one priced at just a few pence, can still cost you 100 percent of your investment should it subsequently drop to zero.

“Equally, it can be hard to keep away from a share that has already multiplied in value many times but if your analysis does not support the current price, then you should stay away rather than piling into a stock that may be overpriced.”

Being too systematic

On the opposite side of the spectrum, it doesn’t suit to be entirely objective when looking at the markets; at the end of the day market prices rely on consumers, all of which are human and driven by emotion, Mr Bennett explained.

“Some investors devise share-trading systems, partly to overcome their emotional biases, but then become trapped by them,” he said.

Following the crowd

“Those investors who always wait to follow the crowd will tend to buy after everyone else and sell after them too,” said Mr Bennett.

As a first-time investor it may seem easier to simply follow others but when it comes to investing, there are other approaches.

“A better approach is to stick to a long-term strategy and not get distracted by other people.”

Anchoring to irrelevant information

“Some investors are deterred from investing at all by short-term volatility and can end up sitting on the side lines in cash for far too long as good opportunities to earn a better return pass them by.

“Investors can be prone to latch onto past data points that no longer reflect current market conditions,” Mr Bennett concluded.