It is relatively easy to make money from the stock market over the long term. Unfortunately, many investors end up making a few critical mistakes over their investment career that can seriously impede investment returns.
With that in mind, I’m going to highlight three of the most common mistakes investors make and what you can do to avoid repeating them.
As investors, there are only really two things we can control when it comes to the stock market. The price we pay to acquire assets and expenses. Deciding how much to pay for an asset can be a complicated process.
Making sure you are paying as little as possible for a stockbroker’s services, however, is relatively straightforward. Today, there’s a range of low-cost stockbrokers that offer dealing services for £15 or less, and most charge significantly less if you’re investing in funds.
Account administration fees have also dropped rapidly over the past few years. Today, you can open a trading account for as little as 0.25% per year, a significant drop on the 1% or more managers used to charge.
The impact the lower fees will have on your returns over time cannot be understated. According to my calculations, a saver with £1,000 in an investment account charging 1.5% a year in management fees, would see their money grow to be worth £1,553 over the space of a decade, assuming an annual return of 6%. If the same saver used a lower-cost account with a yearly charge of 0.25%, their money would grow to be worth £1,749, a difference of £196, or 11.2%. That’s why it pays to keep an eye on charges.
Another mistake that can substantially impact your returns over time is overtrading. The cost of jumping in and out of investments every couple of weeks or months might seem inconsequential at the time, but over the space of several years, these costs can add up. As well as increased commissions, you’ve also got to take into account costs, such as stamp duty, capital gains tax, and the fee you pay to market makers as part of the bid-offer spread. Jumping in and out of investments regularly also doesn’t give enough time to let the investment case play out.
Multiple studies have shown that investors are quite bad at timing the market, i.e. getting in at the bottom and out at the top. Therefore, in my opinion, it isn’t worth trying to time events. Instead, I believe buying and holding quality companies is better for your portfolio over the long term. It also reduces the risk that you’ll make a mistake.
A long-term view
The third most common mistake I think investors make is not taking a long enough view when planning their investments. It’s almost impossible to tell what the future holds for the stock market in the near term. But over the long run, and I’m talking about over the next 10 or 20 years, there’s a very high chance the market will be above the level it is at the moment.
This is why it’s best to take a long-term view when picking stocks, and not guess what will happen in the short term. We don’t know what’s going to happen in the near term and, therefore, trying to guess could only lead to losses.