Saving and investing is not easy. People often make the same mistakes. Here we outline some of the more common ones that we see and suggest some tips on how to avoid them.
Saving can be an easy thing to put off to tomorrow. However saving is a really good habit to get into early. This is true even if you start with a small amount of savings. Furthermore the magic of compounding, means that if you start saving early and see your money grow then the results may surprise you. However if you start saving later in life, then it can be much harder to catch up and reach your goals.
Action: start saving today
It's very easy to invest in what you know, whether that is the stock of your employer or companies in the country where you live. however this can hurt the diversification of your Investments.
Investing in your employer can be risky as you may lose your job and see your Investments decline at the same time. Also just investing in the country where you live can mean you take on more risk than you need to. For example British Investments have recently been somewhat turbulent whereas the global economy, as a whole, has been smoother
Action: don’t only invest in the UK
Ignoring tax efficiency
The government provides a range of tax efficient ways to save. One such example are ISAs which have been set up to help you save and be smart about taxes. ISAs allow you to invest up to a certain limit tax-free. This can help your returns in good markets. The less you pay in tax, the more you get to keep. There are a few different types of ISAs available, at Moola we provide a stocks and shares ISA.
Action: consider if an ISA is right for you
Failing to diversify
Diversification is widely considered to be the one free lunch when investing. If you spread your bets, your returns will likely be smoother, without necessarily giving up any return if implemented appropriately.
For example, if you just own shares in one company, one country or one part of the economy you may see more ups and downs then if you spread your bets across countries and many different firms. In the past this was potentially hard to do for smaller investors, but now fractional investing makes it easy.
Action: Spread your investments
Think long term
Investing in the stock market even within a diversified portfolio is generally best done for 5 years or more. This is because in the short-term the markets can be unpredictable. Although over the long term, markets have tended to rise based on history.
When you're investing it can be tempting to check your portfolio every day, and have emotional reaction to every up and down that you see. However, just as you don't check the value of your home, everyday if you're a homeowner, there is very little need to monitor your investments daily. This can cause more stress and potential costly trading than is needed.
Action: Decide on a sound strategy and stick to it