This month we’re going to look at how fixating on the wrong things can help you to lose money.
Fixating on the short term makes investors prone to forgetting the bigger picture and making unwise investment decisions. With round the clock news and 24 hour trading it’s easy to jump on every piece of information and use it to make investment decisions. In practice, most day to day news is noise and has little impact on the long-term prospects for an investment. At the market level, missing the financial times stock exchange (FTSE) 100’s best 30 days in the past 30 years would turn a 1200% return into a 270%.
Fixating on a particular investment or type of investment regardless of market conditions is an effective way of disregarding risks and losing money. It can lead to narrow portfolios which increases your chances of severe losses. A typical example of this is where people invest all of their money in a buy to let close to where they live and already have their home. They have a belief that property, and specifically property close to them, is the best investment out there. They disregard the wider market, the tax implications and other investment opportunities because they are fixated on the market in which they are already invested.
Fixating on a particular price without any research can stop rational decisions and in turn help you to lose money. Often people have bought an investment and won’t sell it for less than the amount they paid or where it has risen then fallen, won’t sell for less than the previous high. They set this price target regardless of whether things have fundamentally changed with that investment. A good example of this is bank shares. During the financial crisis, rightly or wrongly, the Government invested heavily into the banks “diluting” existing shareholders, i.e. they owned a much smaller share of the bank than they previously did. This means the company needs to be worth many times more than it previously was for the share price to reach its previous high. The investor has no rational reason to believe it’s worth that much, its only that they want it to.
By contrast to the above, fixating on your long-term goals, with regular structured reviews, can help drive behaviours that reduce your chances of losing money.
For more details visit www.nsurefinancial.co.uk or to arrange a free review please call 01903 821010.
By Richard Cohen FPFS ACII MCSI Chartered Financial Planner