This article was contributed by CONNECT by Crossbridge Capital.
Investments are important because you put your money to work. While that is an important first step to take, inexperienced investors often make the following mistakes that would affect their potential returns. Here are the 3 things you need to stop doing while investing.
1. Waiting for the right time
There's a popular Chinese proverb that goes, "The best time to plan a tree was 20 years ago. The second best time is now."
People new to investing know the stock market is a good place to invest. Why? Because they know of a friend who knows of a friend who made money, that one time. But they don't understand what it takes to build wealth – patience, consistency, and more patience.
Charlie O'Flaherty from CONNECT by Crossbridge Capital shares: "Don't spend time agonizing over individual stock picks. Instead, build a well-diversified portfolio with an overall risk profile that you can live with. Start investing as soon as you're eligible and financially capable." You can always make changes.
The stock market has its ups and downs, but rookie investors get tense when the stock market is rocky. They may be tempted to buy when prices rise and sell when they fall. They may be tempted to check their portfolios every so often and panic at any sign of perceived market volatility. As Peter Lynch famously quipped, "It's time in the market, not timing the market that matters."
2. Going all-in on one stock
So we asked the investment team at CONNECT: “Okay, so what’s wrong with investing in a single stock?” Surely you know the saying don’t put all your eggs in one basket?
For new investors, trying to outperform the market by buying individual stocks is a top mistake. That approach carries a lot of risks because when the stock turns sour, inexperienced investors have the tendency to hold off investing, forever. And even if it does work out, they overestimate their stock-picking abilities and make even larger single-stock bets.
Whether it’s large, blue-chip companies such as Disney or Apple or lesser-known firms that the investor thinks will pay off in the future, putting too much effort into blindly picking these stocks eats up valuable time that could have otherwise been spent learning about investing principles that actually provide some value.
Investing is all about minimizing risks. Another downside to investing in only a few single stocks is that when they make a negative turn you may find it difficult to get out of the positions. Hyflux anyone?
So what, then?
The better play is to learn about investment strategies focused on sectors, diversification or asset classes. It will be much more helpful.
Diversify, diversify, diversify! With an investment portfolio spread over many different securities, you can benefit from minimizing your risks while generating good returns. So even if one portion of your portfolio isn’t doing well, other areas can make up the difference. Diversification can help you to manage risk and reduce the volatility of your portfolio.
Remember, no matter how diversified your portfolio is, risk can never be eliminated completely. You can reduce the risk associated with individual stocks but the general market risks affect nearly every stock and so it is also important to diversify among different asset classes and geographies.
The key is to find a middle ground between risk and return. This ensures you can achieve your financial goals while still getting a good night's rest.
3. Not asking about fees and hidden charges
Robo-advisors often lead their marketing efforts with claims of "Low Fees". As more investors turn towards robo-advisors, failure to understand their fee structures can result in a huge drag on your portfolio. Too few people actually ask for a full breakdown before investing with a new advisor. Do you know the fees you're paying when you invest?
Hidden Fees – The fees you pay over prolonged investment periods can affect how much you earn over time. Remember those old investment legacy plans? The management fees alone meant that investors received close to zero gains for the first five years. Did people really buy those? Sadly, yes.
Have you ever wondered how some financial advisors show a low headline fee? It's because their additional charges come from other areas such as:
- Exchange rates for conversion of currency
- Custody (or "safekeeping") fees
- Exit fees
- And many more
For a breakdown in the differences of fees you can expect to pay in a year, check out the annual chart to see how much additional fees you'll be paying.
||Robo-Advisor A – Fixed annual fees on a $20,000 investment
||Robo-Advisor B – Upfront + variable fees on a $20,000 investment
||1% = $200
||0.5% = $100
|*Buy investment fees
||0.1% = $20
||0.1% = $20
||0.3% = $60
|Variable fees X 12 months
||0.05% X 12 = $120
Adding up the numbers, you’re effectively paying 1% (upfront fees, *investment fees, **currency conversion, and ***safekeeping fees) for your first trade in a year, plus an additional 0.6% for your investments over the next 12 months with Robo-Advisor B.
With an investment of $20,000, you’ll be paying a flat 1% in fees ($200) with Robo-Advisor A, compared to 1.6% in fees ($320) with Robo-Advisor B. Would you want to pay additional fees? Of course not.
Getting started with CONNECT – a robo-advisor for accredited investors
As seen above, not paying hidden fees presents a huge benefit to your investments in the long term. At CONNECT by Crossbridge Capital, their transparent fixed annual fees mean that you do not have to worry about additional fees.
To find out more about CONNECT portfolio for accredited investors, visit their website at CONNECT portfolio.
CONNECT by Crossbridge
is a premium wealth management service with more than a decade worth of experience. Crossbridge Capital Group has over US$4.5M of AUM, and their Singapore office is regulated by the MAS.
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