10th April 2014 at 2:22pm
Talking to friends about money sometimes feels like a bit of a taboo. Mistakes seem like failure and success can seem like bragging, so we tend to steer clear.
However, I think we could all learn from our friends. Few of us will ever receive any real training in how to manage our investments, so perhaps it’s no surprise that most of us will make mistakes now and again. Often these are straightforward to fix and perhaps we could learn a thing or two from each other if we could be more open. In that spirit, I thought I’d share 3 common investment mistakes:
Keeping too much in cash
With interest rates so low at the moment, my bank pays less than 1% in interest but inflation is currently at 2%*. And that 1% interest rate is actually taxed at 20% for basic rate taxpayers and 40% for higher rate taxpayers. So there’s no way my cash is keeping up with inflation – in fact my money is actually losing value in real terms. I agree it’s important to keep some money in cash for emergencies or if you might need it in the short term – that’s when the stability cash provides outweighs the fact it’s eroding in real terms.
Over the long term, the stock market has outperformed many other types of investment and investing in this can help protect you from inflation.But if, like me, you’ve been diligently saving for a while, it can be easy to build-up more in cash than you actually need for an emergency fund. That’s when it’s important to consider whether you should start to invest some of this for the longer term in the stock market. Over the long term, the stock market has outperformed many other types of investment and investing in this can help protect you from inflation. This is because company profits tend to move in line with the cost of living over the long term. But you have to be ready for some ups and downs with the stock market, and not everyone finds that easy to cope with.
Investing too much in one asset
Sometimes people are happy to talk about investment issues with friends, however. And this example involves a friend of mine and a flat which is rented out.
His wife owned her own flat before they met, and she has rented out the flat since they started living together. So far it’s been relatively trouble-free and brings in a reasonable rental income, although they’ve not been able to increase the rent for some years now.
But when they look at it like an investment, which is what it really is now, they now see a problem. It’s good practice to invest in funds spread across different assets. These should ideally be carefully chosen so if one falls, losses may be offset by another rising. The problem with the flat is that it’s a large investment in a single asset – it’s not spread at all and so the impact if something goes wrong isn’t balanced out. And there is a lot that can go wrong with rental properties – problem tenants, loss of rent between tenants, cost of upkeep and the difficulty in selling the flat when the property market is still quite flat in that area. As they can’t spread it out, this investment is actually higher risk than they had thought.
Investing and forgetting
When I set up my pension savings some years ago, I wanted to be quite “hands-on”, choosing to build my own portfolio rather than using the managed or multi-asset funds where they do everything for you.
When I set up my pension savings some years ago, I wanted to be quite “hands-on”, choosing to build my own portfolio rather than using the managed or multi-asset funds where they do everything for you. I chose my funds carefully – making sure that not only was my portfolio well balanced, but that my funds also had strong prospects.
Well, that was about five years ago and I have to admit I’ve not reviewed my pension portfolio properly since. That means my carefully balanced portfolio will have fallen out of kilter as the split between funds will have changed over time. And I now have no idea if my carefully chosen funds are still performing as well as they could be. Whilst I thought I was a hands-on investor, if I’m honest, I’m not really interested enough to make the time to keep track as often as I should.
You’re amongst friends…
These are just 3 mistakes, but they’re 3 I thought might strike a chord. Have you made any mistakes of your own that you haven’t told your friends about (yet!)? Post confessions here……
The information in this blog and any responses to comments are not financial advice. The value of investments can go up or down and may be worth less than you paid in.