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Common investment traps

Many investors are guilty of committing these three investment mistakes

We have been in a bull market since the GFC (2008). Because of this prolonged cycle of bullish prosperity, many investors have become complacent in their investment strategy as they expect the traditional asset market (shares) to continue to go up. As we move into 2020, it appears that many investors are continuing with the approach of ignoring risks and chasing market returns, this is creating euphoric market conditions, which could ultimately prove risky as they reverse. 

Looking at the current state of things, we have observed three investment ‘wrongs’ many investors are guilty of:

1. Crowding into one investment strategy

Many investors have the mentality of ‘if it ain’t broke ... why fix it?’. As such, many investors crowd into the same investment strategy, such as holding a large portion of assets in domestic shares, that have been working for the past decade. This leads to improperly diversified investment portfolios that will hold more risk than anticipated should there be a downturn in the future.

With many signs pointing to an eventual bear market, what happens then?

2. Short Term Focus

Living in the now is a great thing; however, this should never be the case when investing. Many investors have a rather short-term focus when investing and forget the past. Remember, the ASX fell by 54% over a 16 month period during the GFC and it took 2,914 days (that’s 8 years) for the ASX to get back to its pre-GFC high.

Sure, it's okay now, but what about in the long term?

3. Buying ‘cheap’ investments instead of ‘good’ investments

Index Managed Funds or Exchange Traded Funds (ETF’s) are all the rage these days because their operating cost is low. Unfortunately, investing in an index fund is great when the markets are going up but leave you completely vulnerable when markets drop. You have no control over holdings.

Sure, it’s cheap, but is the investment strategy actually good?

At WLM, our goals-based approach to advice and investing allows us to create investment portfolio’s that hold an array of uncorrelated assets that we believe, are capable of continuing to achieve positive returns over meaningful time periods no matter where we are in the market cycle, while being relatively resilient to adverse equity market conditions.

For more information on our Financial Planning services, click here.

 

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