Investing sensibly is one of the most effective strategies for achieving long-term financial security. It benefits both individuals and the broader economy. The UK government is actively encouraging greater participation in investing across the population.
However, investing involves risk, and poor decisions can lead to losses. Yet, by avoiding common pitfalls, you can significantly reduce your risk and enjoy the rewards. If you invest through an ISA, remember that all returns are tax-free.
Here are five key mistakes to avoid when starting out, with expert advice on how to steer clear.
Avoid ‘FOMO’ – Look for Value
FOMO, or fear of missing out, is one of the easiest mistakes to make. It often means buying a stock or asset simply because its price has recently surged. This is problematic for two reasons.
First, you should only invest in something you fully understand and have a clear rationale for. Second, buying a quality asset that has recently dipped in price is more likely to deliver long-term gains than chasing the latest trend.
Lindsay James, investment strategist at Quilter, said: “One of the biggest mistakes new investors make is letting fear of missing out drive their decisions. FOMO can lead people to chase whatever is grabbing headlines or soaring in value, without properly understanding what they’re buying or whether it fits their long-term goals. Investing based on this can mean buying at inflated prices and being left exposed if sentiment quickly turns. A far healthier approach is to build a long-term plan suited to your personal circumstances and goals, and stick to it.”
Trying to Find the Perfect Time
Waiting for markets to rise or fall to a certain level is extremely difficult. You are more likely to time it wrong, either buying too high and seeing short-term paper losses, or missing out as the market rises without you.
Instead, feed your money in gradually on a weekly or monthly basis. This is known as pound-cost averaging for UK investors.
Charlene Young, senior pensions and savings expert at AJ Bell, said: “It’s tempting to try and wait for the perfect moment to invest your cash, but it’s impossible to know when that will come. Markets move quickly, and delaying could mean missing out on the best performing days, which can significantly dent your long-term returns. It’s best to focus on time in the market, not timing the market. If you wait too long to take the plunge, you might never do it. If you’d rather not begin with a lump sum, drip feeding your cash into the markets might help you feel more comfortable.”
A Lack of Diversification
Picking just a couple of stocks or funds is a common mistake. Diversification, spreading your money across a wide range of assets, is your best defence against losses.
Quilter’s James said: “Diversification is another crucial principle that’s easy to overlook when you’re just starting out. Putting too much money into a small number of individual shares can leave you heavily exposed if one company or sector runs into trouble. Spreading your investments across different companies, sectors, regions and asset types helps to smooth out volatility. For most new investors, this can be achieved more simply through well-diversified funds rather than trying to select individual shares.”
Not Knowing Your Risk Tolerance and Timeframe
Before investing, be clear on how much risk and volatility you are comfortable with. Stock market prices fluctuate, and you must accept that. If short-term falls terrify you, investing may not be appropriate.
You also need to know when you will need to cash out. Invest only money you don’t need in the short run, over multiple years. This reduces the chance of panic-based bad decisions.
Letting Fees Ruin Your Returns
Overlooking investment costs is a common pitfall. All investments incur fees: trading fees, currency fees on foreign shares, ongoing management fees on funds, and platform fees. Expensive options eat away at your wealth.
AJ Bell’s Young said: “While differences in costs may appear small if they are fractions of a percent, the power of compounding means this can make thousands of pounds worth of difference to the value of your end pot and what you can do with it. The same goes for trading too frequently. While there might be good reasons to change investments, you’ll soon rack up extra charges if you’re constantly tinkering with them.”
When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
