The end of the year is a perfect time not only to review how your portfolio has performed but also to recognise any bad habits that may have been picked up along the way.
So, as we say ‘”cheerio” to 2017 and greet the New Year with a nervous nod of the head, here are 10 things you need to be watching out for.
1. Skipping on research
Buying any company without some understanding of how it makes its money is asking for trouble. Make the effort to read its recent reports. Click here if you simply can’t be bothered.
2. Ignoring alternative views
Thorough research involves asking why an investment or company may fail as much as why it may succeed. Taking a balanced approach ensures we avoid falling in love with certain businesses and become blind to the risks of owning them.
3. Not diversifying
Investing heavily in just a few stocks could bring about life-changing wealth but it requires luck and nerves of steel. If this sounds too risky (and for most people, it is), stick to building a portfolio of quality companies diversified by geography and sector.
4. Not investing according to your own risk tolerance
Understanding your attitude to risk is vital if you’re to reach your financial goals and not be scared away from the stock market. There’s simply no point buying shares in an infrequently traded, ‘jam tomorrow’ company if you’re not prepared for a bit of volatility along the way. Struggling to sleep at night? You’re doing it wrong.
5. Not using up your ISA allowance
Failing to take advantage of your annual ISA allowance is a big no-no, even if you have nowhere near the maximum amount of £20,000 to invest in 2017/18. Build a wall around your profits.
6. Not keeping track of fees
Regularly buying and selling shares sounds like fun but — thanks to commission fees and stamp duty — it’s also costly. To reduce your susceptibility to over-trading, consider keeping a log of all your expenses. If the costs begin eating into the gains from your portfolio, question your approach.
7. Assuming that cheap shares signify value
Many large companies suffered significant falls in their share prices over 2017. Don’t assume that these are now worthy of investment without doing appropriate research (see Habit 1) — they could have further to fall. Conversely, don’t be fooled into thinking expensive stocks can’t continue rising.
8. Not running winners
Thanks to our tendency to snatch at profits, failing to stick with our best-performing stocks can be very bad for our wealth. If the story hasn’t changed (and the valuation hasn’t entered bonkers territory), why not hold on?
9. Ignoring your investing time horizon
A person’s investing time horizon will depend on their financial goals. Those wishing to buy a house in five years should probably stick to less volatile assets. Those investing for retirement several decades away can afford to have a far greater proportion of their wealth in equities. On a long enough timeline, a few down days/weeks/months really won’t matter.
10. Assuming that acting is better than not acting
Investing is one of the few areas in life where inactivity often translates to better performance. Before taking action on your portfolio, consider whether your motivation for doing so is based on nothing more than boredom. If so, it may be better to sit still.
How to achieve financial freedom
Avoiding the bad habits listed above won't guarantee huge returns and/or the possibility of retiring early, but it certainly won't do your prospects any harm at all.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.