- Starting to invest is an important first step in building long-term wealth
- But trying to time the market, chase winners or panicking in downturns can quietly sabotage the returns investors achieve
- Five beginner investor mistakes and how to avoid them
Charlene Young, senior pensions and savings expert at AJ Bell, comments:
“Investing rewards patience and discipline over the long term and you’re already ahead of the curve by simply getting started. The advantage new investors have today is the ability to learn from the early mistakes of others without paying the price themselves. By understanding the common pitfalls upfront, investors can keep costs in check, and stick to a clear plan for building long-term wealth.
“Here are five common beginner mistakes to watch out for and how to avoid them.”
1) Trying to time the market
“It’s tempting to try and wait for the perfect moment to invest your cash, but it’s impossible to know when that will come. Markets move quickly, and delaying could mean missing out on the best performing days which can significantly dent your long‑term returns.
“When markets fall, it can be tempting to sell out to cash and protect what you have left. But selling out when your goals haven’t changed could lock in losses and mean you miss out on any recovery, and you might go around in circles about when to go back in. We’ve seen numerous examples of strong daily market upswings following shocks or downturns in recent years, and most recently volatility due to the Iran war, ceasefires and hopes for peace talks.
“It’s best to focus on time in the market, not timing the market. If you wait too long to take the plunge, you might never do it. If you’d still rather not begin with a lump sum, drip feeding your cash into the markets might help you feel more comfortable.
“Using a regular investment service automates the process for you and removes the emotion from investing. It can also help you smooth any ups and downs in investment prices thanks to something called pound cost averaging.”
2) Lack of diversification
“It might sound obvious, but putting all your investment eggs in one basket is a risky strategy. If the specific sector or stock you’re invested in struggles, your portfolio takes the full hit. Diversification aims to spread and balance some of the risks of investing and smooth your return over the long term. It’s impossible to eliminate risk completely though, especially when you consider ‘safe’ assets like cash faces the risk of being eroded in value thanks to inflation.
“It’s crucial to note that diversification isn’t simply having lots of holdings either. If you’ve got multiple shares or investments in similar regions or sectors, you might still be exposed to higher market risks than investing in something like a multi-asset fund. These funds pool investors’ cash together and spread it across different types of investments, such as stocks and shares, bonds, cash and alternatives like gold or property within one fund. While it might appear you have one holding in your portfolio, you’re actually invested across hundreds, or even thousands, of underlying holdings.“
3) Investing without a plan
“Investing should be driven by your goals and timeframe, not headlines or short-term noise. Having a plan and strategy aligned with your goals means you’re more likely to stay disciplined and remain invested through any volatile periods.
“It doesn’t have to be complicated; most goals simply fit into a defined type and have a timeline plus a price or target value. Defining your goals also helps you choose the correct account to invest in. You can balance the tax advantages that might be on offer with how and when you might need to access the funds as you approach the later stages of your timeline.”
4) Not keeping a lid on costs
“Keeping your investing costs as low as possible is one of the best ways to help you keep more of your investment returns over the long term. While differences in costs may appear small if they are fractions of a percent, the power of compounding means this can make thousands of pounds worth of difference to the value of your end pot and what you can do with it.
“The same goes for trading too frequently in the same or similar investments. While there might be good reasons to change investments, you’ll soon rack up extra charges if you’re constantly tinkering with them. This isn’t just the buying and selling price of funds and shares (the spread) but dealing charges and potentially UK stamp duty or foreign exchange fees too.
“Avoid this pitfall by shopping around for the best value account that meets your needs in the first place and make sure you know what fees you expect to pay. While account charges might be easily comparable, there are differences in what platforms charge for dealing investments, and foreign exchange fees. A regular investment service might lower, or even eliminate, dealing charges versus making the same frequent investments yourself.”
5) Chasing past performance
“A share or company that's done well recently might look like a safe bet going forward. But top performers often attract attention after the big gains have already happened, meaning that investment could be overvalued or become a target for existing investors looking to sell and bank any profits.
“Investing is for the long term, and it’s important to look at how an investment has behaved over time and in different market conditions as well as how it might fit into your overall portfolio.
“If you’re unsure how to research a particular stock or company, passive investing might be a better option. Passive investing involves picking an index which could be a stock market such as the FTSE 100 or S&P 500, a collection of commodities, a basket of bonds or investments related to a specific theme or industry sector.
“A passive fund, sometimes known as a tracker, simply looks to replicate the performance of an underlying group of investments. As well as spreading risk, passive funds are low cost and will save you research time. And while they’ll never beat the index they are tracking, that could still mean higher returns versus trying to pick your own portfolio.”
