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Written by Ivan Fletcher – Senior Adviser
1. Not setting financial goals
It’s important to set achievable goals for the short and long term and set a budget to achieve them.
Short term goals may require saving cash – example a car purchase in 1-2 years.
Longer Term Goals (5 years plus) may involve investing in the share markets to seek greater returns.
The first goal to consider is your savings capacity. How much surplus can you save per fortnight or month. This needs to be achievable and represent an average. This should become the first payment you make for the fortnight or month once you receive your income,– putting aside the nominated savings amount to commit to your goal and also to put the money out of reach from your regular expenditure. This may also be supported by Capping your Credit Card accordingly so that you cannot spend beyond your income.
Many of you will remember the “First Class Ticket” program with Hudson some 25 years ago.
Those principals are still used today and appear in many widely read ‘financial help’ books.
Set yourself a goal and then make a regular transfer of money towards that goal.
Even the most simplest of plans such as saving for a holiday start with setting a goal and a means to achieve it.
2. Not putting aside money for emergencies
Investing in the share market is a Long term Investment. The market is volatile and should be considered as a minimum a 5 year investment. Any short term objectives (example a car upgrade) should be met with savings to short term investments with a buffer for emergencies.
Without a cash buffer, you risk being forced to take on debt if you run into liquidity trouble, such as the loss of your job. A good rule of thumb is to have at least 3 to 6 months’ worth of living expenses in a savings account (or offset to a home loan).
Further, you should not consider an investment program until any high-interest debts, such as credit cards and personal loans have been paid off. The money you save on interest payments is likely to exceed the income you would generate through investing.
3. Lack of Diversification
Betting the farm on a single stock is a really good way to end up without a farm. Owning a broad portfolio of stocks and other growth assets, such as property, is less risky and more likely to produce satisfactory, consistent returns over time.
If you’re just starting out with a small amount of capital, it can be tempting to put it all in one or two shares to keep transaction costs low but you may be better off investing this initial nest egg in either an index fund or with an active manager, which will spread your money across a diverse range of stocks. Seeking a return that is in line with the markets provides a greater probability for successful returns. A thinly diversified portfolio will almost certainly result in higher volatility with the increased risk of underperforming the markets as a whole.
Diversification should also be across various markets. To invest in only Australian Share market is to limit your investment universe to just 2% of the world stock markets.
4. Investing with the News
We live in a high tech society where news’ travels with the speed of the internet.
By the time news (good or bad) has reached you, it has also reached the rest of the globe and the share markets have already likely absorbed that news into current pricing.
Jumping on a stock after the announcement of good news does not necessarily mean it is the best time to buy as that good news is likely to already be reflected into current pricing.
As an example the Drug company Pfizer who has one of the COVID Vaccines had a peak in share price on 08 December 2020 around $42.56 but at time of writing share price was only $33.78 which is about the same share price as 12 months ago when it became clear that we were facing a Global pandemic.
5. Panicking when Share Markets Fall
Seeing your portfolio drop 35% in 6 weeks during the initial outbreak of COVID 19 was disturbing for everyone. Just as the panic in supermarkets unfolded before our eyes, so to did the share markets.
Both proved to be misguided. Anyone who sold out of shares or switched to cash by selling into the fear then missed out on the market’s recovery.
Keep calm, focus on the long term, and remember Warren Buffett’s timeless advice: ‘Be fearful when others are greedy, and greedy when others are fearful.’
Remember that share markets will always react to news and in many instances will over react to bad news until some meaningful data is available. Using the COVID example the share markets took on the worse fears before government responses to stimulate economies and households had been properly formulated.
Remind yourself that the stock market will always bounce around in the short to medium term and remind yourself that buying into the market when prices are low presents an opportunity. The share market has always surpassed the previous high in developed markets.
If you wish to speak to an Adviser at Hudson Financial Planning, please call direct on 1800 804 296 or submit a contact form directly on our website.