This is the first part of a two part article, where we’ve taken a look at some of the common mistakes investors make when they’re buying and selling stocks and shares and other investments. We’ve identified ten mistakes – and this month, we take a look at the first five.
1. It Costs Money
Despite the internet driving down charges, buying and selling shares still costs money. If you’re buying a share for £2 the true price is £2 plus the dealing cost: if you’re selling for £2 a share, you receive £2 less the cost of the transaction. There are now plenty of online buying and selling services – but make sure you shop around, and compare the costs in your likely investment band. If you only invest £500 in shares, don’t go for an online service that specialise in transactions that are ten or twenty times that size.
The same is true if you are buying investments funds from a fund manager – there’ll be an upfront charge and an annual management charge. Again, do your research. There are some intermediaries who will reduce the initial charge significantly: but that will be on an ‘execution only’ basis – if you want any advice, then expect to pay for it.
2. It’s Your Money, Not the Taxman’s
Simple maths dictates that if you are not paying tax on your investments then they’ll grow much more quickly. The Individual Savings Allowance for the current tax year is £11,520. This means that a husband and wife could invest just over £23,000 in stocks and shares and do it tax efficiently. Over the years, the difference between paying tax on your dividends and capital gains and not paying tax compounds significantly.
There is simply no point in giving money away, whether it is to the taxman or in unnecessary charges – so before you invest any money, make sure you have done your homework and taken the necessary steps to minimise the amount of tax you’ll have to pay.
3. Following the Trend Won’t Make You Rich
There’s an old investment maxim which runs along the lines of “buy on bad news; sell on good news.” The theory behind it is that if everyone wants to buy something the price will be artificially high: stockbrokers will confirm that the time most people want to buy shares is when the stock market is at its highest.
So if you’re making an investment ask yourself a simple question: am I buying this just because everyone else is buying it? As we saw with the dotcom boom, that may work for a while – but as all too many small investors then found out to their cost, it is not a viable long term strategy.
It’s hard to go against the conventional wisdom – but sometimes it can pay very healthy dividends.
4. Listen to your Grandmother
“If you don’t understand something, don’t buy it.” “If it seems too good to be true it is too good be true.” Two sayings that your Grandmother would definitely have been familiar with – and as true today as they have ever been, particularly in the world of investing.
You need to do your research before you make an investment – especially as it is now very easy to invest anywhere in the world and there are some apparently very attractive propositions out there. Remember too that if you are investing in a foreign country then the investor protection may not be the same as it is in the UK.
5. Don’t Fall in Love
You may own a particular share or other investment which has performed very well for you in the past. However, if it has started to perform badly then you should think about selling. Don’t fall in love with your investments – ask yourself, “Would I buy this share today?” If the answer is no, then give serious consideration to selling. As we are constantly told, ‘past performance is not a guide to future performance.’
Similarly, investments do not ‘owe you money.’ If you bought a share at £2 and it has fallen to £1.50 it doesn’t owe you fifty pence. £1.50 is what people think the share is now worth: don’t be afraid to cut your losses if something is clearly going wrong.
Next month we’ll be back with another five common investment mistakes. In the meantime if you have any questions on any of the points above – or on any aspect of your financial planning – then please don’t hesitate to contact us. We’re only a phone call away.