I have met with hundreds if not thousands of people over my 14-year career and have seen many, many financial situations. As a result I have been able to compile a short list of common money mistakes. If you identify with any of these, please don’t worry – we have a plan to solve it!
Common Money Mistake Number 1 – Investing in something you don’t understand
How many times have I heard, “we lost money on the share market”…..
Losing money on the share market has normally been associated with someone purchasing a couple of shares (typically high-risk shares with very little research), and then being disappointed with poor returns. Or, they had a very aggressive (high-risk) strategy which seemed good while the share market grew, but as soon as the share market fell, they panicked and switched to cash.
In this instance I like to ask, “What lesson did you learn?”. This question helps to understand how you feel about the experience and what you are likely to do going forward. Often the answer is, “I will never invest in shares again”. When this happens, I like to use the following analogy:- “If you work on a construction site without a helmet and you get hit on the head, what lesson did you learn? Should you never work on a construction site again? Or should you just wear a helmet next time?”
Over the last 5 years (to the end of April 2021), a diversified all growth super fund has achieved an average return of 10.9%*. What a terrific result!
Unfortunately however, if you panicked out of the market at the bottom of the crash, the result was severe.
On a $500,000 investment, without switching to cash, your portfolio would be worth $930,000 today. But if you switched to cash at the bottom of the Coronavirus crash, your portfolio would be worth $330,000 less (assuming you locked in a 20% loss in March 2020)…
The simple lesson here was, I should have done nothing. Trying to time the market and worrying about short term volatility normally results in losing money. I understand the Coronavirus was no small issue, and it caused high anxiety levels for investors. However what lesson did we learn over the past 18 months? It’s the same lesson we should have learnt from every other market crash:- Its time in the market, not timing the market, which results in the best possible outcome.