The three biggest investing mistakes I see people make seem obvious to me now. I wish I could grab every one of you and give you a shake!
It really is easy to enrich yourself once you’ve got a bit of experience under your belt, so let’s dive in.
Not investing consistently
I thought I’d just add money to my Stocks and Shares ISA whenever I could. That was my 2010 New Year’s Resolution. These tax-efficient accounts had already been around since 1999, introduced by then-Labour Chancellor Gordon Brown.
Of course it didn’t happen. Because I didn’t make the effort to set up a Direct Debit to my Stocks and Shares ISA, the money I hoped I would set aside just disappeared on frivolous purchases.
When you don’t invest consistently you lose the ability to make the most of what is called ‘pound-cost averaging’. Invest at set regular intervals and you can buy shares in your favourite high-yield companies when the price is low, as well as when it has appreciated a little.
This stops you from overpaying with a single lump sum when share prices are high.
No one wants to pay more than something is worth. Imagine going to a restaurant and the manager sees you coming, and puts up the price of a steak from £12 to £40 because they’re busy. The same principles applies here. If I’d just fed a regular sum into my Stocks and Shares ISA over a long period, I would have gotten a better average price for my shares.
Buying and selling too often
One piece of advice I wish I’d known sooner was to ‘run the winners’. That means not taking small profits from shares that have appreciated in value in the short term. The power of compound interest means you are much likely to get richer if you make good purchases and let them sit for the long term.
Not diversifying enough
Diversifying your portfolio — the funds or stocks you hold in your Stocks and Shares ISA — means you are more protected against a big fall in one sector, like manufacturing or financial services.
One common investing mantra is to invest in what you know. As a wet-behind-the-ears investor, I thought I was being clever by only buying shares in video games companies. But a single piece of legislation, a tax break that gets slashed or any other regulatory change can see profits fall in your favourite businesses and the share price dive along with it.
If I had my time again I would have spent my first few thousand pounds buying top high-yield funds instead of individual company shares. Funds like the popular iShares UK Dividend UCITS ETF, which pays out 5.75% a year at current prices, track the performance of lots of different high-paying companies. This gives you instant diversification to many sectors and protects you against a plunge in any one area.
Ask any older investor what their biggest regret is, and they’ll likely tell you they wished they had started investing sooner. Once you see compound interest at work, it becomes self-evident that the longer you let your money work for you, the richer you will become.
Views expressed 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.