M&G Investments’ Grayson Rainier has provided a list of six investment mistakes to avoid if you want to achieve the best returns.
Rainier said good investors understand what they’re investing in, why they’re investing, and what type of investors they are.
These points help investors to create a plan to reach their long-term financial goals.
When you invest for the long term, there is always a risk of costly mistakes. However, you can minimise the risk by being aware of common mistakes.
Miscalculating your tax benefits
Some investment products come with tax benefits – but to make the most of these perks, you’ll need to make sure you play by the rules.
A good example would be a tax-free investment. Designed to allow you to grow your wealth, you must stick within the R500,000 lifetime limit and a maximum of R36,000 per year.
If you overcontribute, which can happen if you lose track or make sizeable, ad hoc contributions, you may be heavily taxed.
- Top tip: The sooner you contribute that R500,000, the longer your money has time to grow, all the while building up tax-free growth.
Overexposure to one asset class
Diversification is a crucial step in successful long-term investing. If you are exposed to only one asset class, you can miss out on attractive returns in others and are likely to lose more in a downturn.
Diversification can help you manage the downside and generate inflation-beating returns, as all investments carry risk.
You should invest across geographies, asset types, currencies, and financial instruments.
- Top tip: A debit order makes diversification easier, enabling you to reduce your timing risk by getting the average price across all the months you invest, known as rand-cost averaging.
Following the crowd
It’s easy to get caught up in what friends, family and the media are saying about the markets.
Although smart investors should get recommendations before investing, this can work for or against you.
Don’t forget that your peers may not share your risk appetite or investment horizon and what works for them may not be the best option for you.
- Top tip: Speak to a financial adviser. A qualified professional can sift through the latest news and trends and advise on practical investment decisions relating to your unique financial circumstances.
Ignoring the clock
Investing early is one of the fundamentals of successful long-term investing. Any time that passes is time you could be invested.
- Top tip: Embrace the clock and make the most of your time by investing early, reinvesting your earnings, and staying the course.
Forgetting about fees
Having a solid grasp of the costs of investing is essential. Even fees that appear small can have a major impact on your portfolio over time.
By understanding the impact of fees and expenses on long-term performance, you will be able to be more deliberate when selecting investment options.
- Top tip: Before investing, ask about fees upfront to know what you are paying.
Being afraid of risk
Being fearful of risk is not unusual, but letting it override your investment decisions is a long-term mistake.
- Top tip: It is important to take some risk to invest successfully, always considering your risk tolerance and investment horizon.
“Being a good investor means designing an investment strategy that works for you personally and doing your best to stick to it, no matter what,” Rainier said.
“By gaining a sound understanding of who you are as an investor, you can avoid making the mistakes mentioned above.”