To put this into perspective, a $5000 annual investment for 20 years, at a 7.2% return (the 60/40 equity bond split) would be worth $209,510 as opposed to $125,183 for the average investor. Over longer time periods, these are life changing mistakes. People that fail to invest effectively will find their latter life rather less comfortable than it would otherwise have been.
Year after year, investors get caught up in market fads, buying near the top and capitulating near the bottom, or attempting to catch a ‘falling knife’ that has further to drop.
A good example of the latter is Carillion, the construction company, previously a stalwart of the FTSE 250, which was rocked by profit warnings and fell 88% in the year to 17 November 2017. The share register was previously full of institutional investors, but now Hargreaves Lansdown, Barclays, TD Direct Investing, and Halifax Share Dealing make up four of the top six largest shareholders. Do retail investors know something the professionals don’t?
Carillion may prove to be a stunning investment opportunity, but it is one of many examples where retail investors have attempted — and failed — to catch the knife.
Blend your active investing with a longer-term holding
Investing in individual stocks offers great opportunity, but the pitfalls of getting it wrong, with too large a proportion of your investments, can be calamitous. Maths dictates that an investment that falls 70%, requires a rise of more than 230% to get back to break even.
Diversification is the best route to avoiding this investment pitfall, both in terms of asset allocations and in terms of who invests your money.
The most experienced of investment professionals will manage some of their own wealth, while outsourcing the management of the rest to a professional team that has an investment mandate to target a certain asset allocation or level of risk. This is because, no matter who we are, we are all susceptible to making terrible behavioural errors when under pressure.
IG Smart Portfolios are designed to assist the investor, both by providing a long-term low-cost allocation that suits your risk profile, but also by removing the temptation to time the markets. Markets fall and markets rise, but to the long-term investor this doesn’t matter. They key is to be rewarded for the risks you take, to harvest the risk premium of different asset classes, and to compound those returns at a steady pace.
You can open an IG Smart Portfolio with as little as £500, and it takes few than 10 minutes to start that investment journey