Yes, it’s almost that time of year again, when the All-England Tennis Championships turn us — for two weeks only — into raving tennis fans. Wimbledon also persuades many of us to dust down our racquets and have a go ourselves. The contrast between professional tennis and social tennis, as Charley Ellis reminded us again recently, is an excellent analogy for investing. There’s a tiny number of top professionals who grace the courts of SW19… and then there’s the rest of us, for whom winning is all about avoiding mistakes. By keeping those pesky double faults to a minimum, and by focusing on landing the ball in your opponent’s court, you give yourself an excellent chance of success. Avoiding investment mistakes is just as important.
For financial journalist Moira O’Neill, here are three of the most common mistakes you really need to avoid.
RP: Discussions about investing at dinner parties often revolve around spotting a brilliant opportunity.
But identifying a great investment in advance is extremely difficult to do. Investment journalist Moira O’Neill says it’s more important to avoid making mistakes. The most common one, she says, is failing to diversify.
MO: You need to make sure that you’re spreading your money, you’re spreading your risk, and you’re not putting your eggs all in one basket. Because that can be terrifying: if, as an investor, you put all your money in one or two shares, and you saw the stock market dive, you’d be scrabbling around. It would affect your emotions, it would affect your family life. It would be terrifying. If you’ve got a diversified portfolio, then the risks of that happening are much lower.
RP: A second mistake is having too many funds. It’s far better to have just a few funds — or even, to start with, a single global equity index tracker.
MO: So investors quite often, every year, the tax deadlines come round or they think about what surplus they’ve got to invest. And at that time, they pick something that’s fashionable or that seems like a good idea at the time. So they do that consistently every year, and they build up a massive amount of clutter – 50, 100 types of investments – and there’s no organisational structure there. I think people need to keep it as simple as they can.
RP: For Moira O’Neill, the third big mistake investors make is to fail to take advantage of the tax breaks on offer.
Different countries have different rules, but wherever you live, paying more tax than you need to on your investment returns makes no sense at all.
MO: People tend to take out general trading accounts that don’t have any tax advantages accrued to them. So if they pick a really great investment and make a big gain, they’re then going to be faced with the tax bill. So I think it’s really important to get as much invested in a tax-efficient way.
RP: So, diversify, keep your portfolio simple, and avoid paying too much tax. Get the basics of investing right, and you can’t go too far wrong.
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