In a recent study, deVere Group - a global independent financial consultancy - asked 880 global high-net-worth clients to determine the biggest investing mistakes they made before they decided to get help from a professional. The sample included investors based in the U.K., the U.S., South Africa, Hong Kong, Japan, the UAE, Indonesia and Thailand with investable assets of more than £1m.
According to their responses, the following were identified as the biggest investing pitfalls:
1. Not adequately diversifying their portfolio (23%)
According to Fidelity, staying diversified among and within different types of stocks, bonds and other investments “can help set the appropriate level of risk for an investor’s time horizon, financial goals, and tolerance for portfolio volatility”. While staying focused on a single asset or industry can understandably help making someone rich, it could be disastrous when trying to invest or preserve wealth. It is therefore vital to spread your money around in order to manage risk.
2. Investing without a plan (22%)
Having a financial plan is a recipe for success research says. A recent CFP® board survey has shown that more than half (52%) of those who go with a plan feel “very confident” about managing money compared to 30% who don’t have a plan. Having a comprehensive financial plan can help boost up your wealth, maximise tax efficiency, plan for life’s unexpected events and so on.
3. Making emotional decisions (20%)
Inevitably, the economic downturn affects investors’ decision making on crucial financial aspects. Studies have shown that people are more susceptible to losses and indifferent to small gains when they feel psychologically stressed. Managing your emotions when making important investment decisions is key for success. Working with an independent financial adviser is one recommended way to eliminate bias and prejudice that stem from excessive emotional decisions.
4. Failing to regularly review their portfolio (16%)
Portfolios can go off track if they are not reviewed regularly. Investments need to be assessed and perhaps rebalanced at least yearly, if not more often, to ensure they still deserve their place in the portfolio and that they are still on track to reach your long-term financial objectives.
5. Focusing too much on historical investment returns (14%)
High-net–worth individuals used to rely heavily on historical returns rather than future expectations to determine future returns. However, past averages may have little relevance on the current environment and the actual returns you receive.
Interestingly, 5% of respondents cited other mistakes, such as being impatient, investing near the top of the market, relying on advice from acquaintances, and paying tax on the investments unnecessarily.
deVere Group's CEO, Nigel Green notes: "Mistakes investing can and do occur - it is how they are best avoided, or at least mitigated, that is the key to success. Learning lessons from people, like those we polled, who have overcome these common investment mistakes to go on to accumulate significant wealth in the longer-term is a way to reduce costly errors”.
Mr. Green went on to say "Due to the complexities of investing and the potentially devastating effects of committing expensive avoidable errors, the best thing to do is to seek advice from a professional independent financial adviser who will help circumnavigate the common and not-so-common pitfalls. Avoiding just one of these mistakes - and there are many others - can literally make the difference between poverty and financial freedom".
All in all, the study shows that millionaires’ mistakes do not significantly differ from our investing mistakes. What is important though is to firstly identify the error, learn from our mistakes, resort to a financial advisor to seek for solutions and avoid doing the same mistake.