6 Common Investing Mistakes to Avoid for Share Market Success

6 Common Investing Mistakes to Avoid for Share Market Success

A quick guide to six all-too-common investing errors and strategic tips for avoiding them, ensuring your investments flourish.

Investing successfully and improving your investment portfolio can be as much about minimising mistakes as trying to pick the ‘next big thing’. It’s all about taking a calm and considered approach and not blindly following trends or hot tips.
Let's delve into some of the most prevalent investment mistakes and look at the principles that underpin a robust and successful portfolio.

Chasing hot and trending shares

Every so often there are industries or shares that are all over the media and you may begin to worry that you are missing out on something. For example, there was the ‘dot com’ bubble in the early 2000s, the social media hyped ‘AMC’ shares in 2020 or the lithium shares in 2022. Jumping on every trend is like trying to catch a wave; you might ride it for a bit, but you're bound to wipe out sooner or later. That’s because the hot tips and ‘buy now’ rumours often don’t pass the fundamentals of investing test.

The key is to keep a cool head and remember that the real winners are often the ones playing the long game.

Not knowing your ‘why’

What would you like your investment portfolio to achieve? Understanding your motivations and goals will help you to choose investments that work best for you.

If you want to build wealth for a comfortable retirement, say 20 to 30 years down the track, you can afford to invest in riskier investments to play the long-term game. If you have already retired and plan to rely on income from your portfolio, then your focus will be on investments that provide consistent dividends and less on capital growth.

Timing the market

Timing the market involves buying and selling shares based on expected price movements but at best, you can only ever make an educated guess and then get lucky. At worst, you will fail.

As the world-renowned investor Peter Lynch wrote in his book Learn to Earn: “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves”.i

Putting all the eggs in one basket

This is one of the classic concepts of investing and something that you have probably heard many times. But it’s worth repeating because, unless you are regularly reviewing your portfolio, you may be breaking the rule.

Diversifying your portfolio allows you to spread the risk when one particular share or market is performing badly.

Diversification can include different countries (such as adding international shares to your portfolio), other financial instruments (bonds, currency, real estate investment trusts, exchange traded funds), and industry sectors (ensuring a spread across various sectors such as healthcare, retail, energy, information technology).

Avoiding asset allocation

While diversification is key, how do you achieve it? The answer is by setting an asset allocation plan in place.

How much exposure do you want to diversify into defensive and growth assets? Within them, how much should be invested in the underlying asset classes such as domestic shares, international shares, property, cash, fixed interest and alternatives.

Then review your asset allocation from time to time to rebalance any over or under exposure that may occur due to market movements.

Making emotional investment decisions

The financial markets are volatile and that often leads investors to make decisions that in hindsight seem irrational. During the COVID-19 pandemic, on 23 March 2020 the ASX 200 was 35 per cent below its 20 February 2020 peak.ii By May 2021, the ASX 200 crossed the 20 February 2020 peak. Many investors may have made an emotional decision to sell out during the falling market in March 2020 but then would have missed the some of the uplift in the following months in.

Some of the other common investment mistakes include reacting to the noise in media, trading too much, over-diversification, not reviewing your portfolio regularly to ensure it still aligns with your goals, not doing enough quality research and not working with a professional.

Seeking out quality and trustworthy financial advice can help to minimise investment mistakes. Give us a call if you would like to discuss options for growing your portfolio.

The cycle of investor emotions
Behavioural finance is the study of how psychological influences can affect investing and markets. This chart shows how emotions affect an investor’s behaviour at different points in the market.

Source: Russell Investments - Cycle of Investor Emotions | Russell Investments

  • When your investments are rising, you feel optimistic and eventually reach euphoria which is at the peak of the market and it makes you feel like the smartest person in the room, tempting you to take more risk.
  • As the markets drop, you may deny it as a short-term blip. As it keeps falling, panic sets in eventually leading to despondency – making you question your entire investment decision.
  • As markets start to rise again, there is hope which ultimately leads back to optimism which is the start of the cycle all over again.

Having a financial adviser coach you through this wave of emotions can be a way to limit making irrational decisions.

i From the Archives: Fear of Crashing, Peter Lynch - From the Archives: Fear of Crashing - Worth
ii Australian Securities Markets through the COVID-19 Pandemic - Australian Securities Markets through the COVID-19 Pandemic | Bulletin – March 2022 | RBA

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Gambling and Investing

Nick Radge of The Chartist fame made a comment on facebook this morning, asking the question; "All trading can be considered gambling... is something I hear on occasion. What do you think?"

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Financial Education

It was given only a fairly quiet launch, but we thought it was worth mentioning the new financial education website released by ASIC this week.

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Tax Planning 101 - Beware Wash Sales

Let's start with an example to make things a little clearer:

An investor (on a 45% tax bracket) has managed a profit of $20,000 for the year buying and selling shares. At this stage (ignoring any discount method claims), the investor owes $9,000 in tax from the $20,000 profit.

Let’s say that the investor is also holding 3 shares with an unrealised loss of $5,000 between them.  In order to save tax, the investor sells off these shares and crystalises the loss. Assuming $29.95 brokerage per sale, the investor’s new profit is $14,910.15. The tax liability on this new profit is $6,709.57, which is a saving of $2,290.43 worth of tax.

Now if that investor were to buy back their stocks (assuming at sale price for this example) they would be liable to another $89.85 in brokerage. This takes the net benefit to $2110.73. This method is known as a wash sale, and strictly from a tax point of view, would appear to be a favourable option as you've saved tax and kept your assets. Unfortunately the ATO are all too aware of wash sales and consider them illegal. For more info, visit the ATO website.

If you have undertaken what you think is a wash sale it is better to treat it as if you never sold the asset. There is no problem, however, to selling a share for a loss at market value, provided the dominant purpose is not for a tax benefit. Note that you shouldn’t base a sale purely on the tax benefits anyway as you should have your investment strategy in place for a reason. But if you were thinking about offloading some underperforming assets to reinvest into something with more potential, then it may work out better to do so on this side of the EOFY.


Using a trust to invest in shares

As I’m sure we’re all aware, a great method for investing in property can be to purchase it through a trust. There are a number of benefits to property investing in a trust, such as asset protection, tax advantages and estate planning. So does share investing using a trust carry any benefits?

In my opinion, I would say... well, it depends.

On asset protection; you are not generally vulnerable from a legal perspective if a company is being sued and you are a shareholder, so there is no real need for protection from that perspective. However if, for example, you run a business - or may do in the future - then keeping your assets safe may be a priority.

The trust does give you the power to distribute profits to different beneficiaries to minimise tax payable, although if we’re talking long term share investments a lot of that income will be coming from franked dividends, so a lot or all of the tax payable (depending on your tax bracket) will have been paid for you. The benefit though comes from being able to distribute those franked dividends to beneficiaries on lower tax brackets (such as children, or a non-working spouse) to get the credits refunded in part or even in full.

On top of that the capital gains that do arise are likely to be eligible for a 50% discount (if held for more than 1 year), regardless of whether you hold in your own name or in a trust.

Trusts also cost a little to set up and maintain, which is no issue if you expect the benefit to exceed or justify the cost. Whether or not you do decide to use a trust for share investments often comes down to personal preference and priorities, and the more complicated your finances become the more likely it is that a trust could become useful. 'Small' investors may have no real need for such a structure, while larger players may find that the potential advantages really start to add up as their portfolio grows. As always, it's important to start with the end in mind, so it might be worth looking at where you plan to be as well as where you're starting from.


Margin Loan Calculator

Margin lending can be a very effective way of boosting your investment portfolio if you have a limited amount of capital.  It allows you to boost your investment power, giving you the potential for higher gains. The flip side of that though is it can increase your losses as well as hitting you with interest and other fees.

In order to obtain a margin loan, you need to provide security, as you do when obtaining a home loan. This security can be in the form of cash, securities or some managed funds. A lender will apply a loan to value ratio (LVR) to each security, allowing you to only borrow as much as the market value of that share times the LVR.  E.g. if BHP had a LVR of 75%, and you had $10,000 worth of BHP shares, then you could borrow $7,500 against that.

The other main issue with margin loans is the danger of getting a margin call. If the price of your share goes down, bringing your LVR above the approved threshold, then the lender will insist that you either sell some shares or pay down part of the loan immediately to bring it back into line.

To assist with analysing the benefits of margin lending and how it could affect you, I have posted a spreadsheet on our site which will compare a portfolio with a loan with a portfolio without a loan, so feel free to check it out.

Note that this spreadsheet is a guide only, and there are various other things to consider when obtaining a margin loan, so if your keen on the idea of increasing your investment power, make sure you do your research first!


ETFs & ETCs

In my last post I mentioned using diversification to manage risk in the share market. A simple way of broadening investments is by using ETFs & ETCs. These are Exchange Traded Funds and Exchange Traded Commodities. Both ETFs & ETCs trade on the ASX so are very simple to acquire. Using ETFs you can gain access to a portfolio of the top Australian shares,  different sectors, and international markets.

ETCs work in much the same way, but let you track the performance of the major commodities.

Like with any investment there are risks in investing in these funds, and if you want to get the feel of how they perform and how you can best use them to in your own investment strategies; why not join our share game, in which you can now trade both ETCs & ETFs as well as ordinary shares.

Good luck and happy trading!


Managing risk in the sharemarket

Last post I talked about finding value in the share market, using indicators such as EPS & P/E ratio. This week I’d like to have a quick look at managing your risk.

If you are looking at investing for the longer term it’s important to do the research. It can be very tempting sometimes to be drawn in by a share with an extremely volatile graph that looks like it could make a big profit in a short time. However a graph is not enough for me to make a decision.  Generally when I am buying a share in a company I like to be able to write a written response to the question ‘Why am I buying this share?’

If I can’t come up with a response, with statements and evidence on why I think a share is a good buy then I won’t proceed with the transaction. Basic things I look for are:

  • Is the company actually turning over profits?
  • Is the share worth the price I’m paying?
  • Does it have consistent EPS & profit growth?
  • Does it have a decent amount of cash to support it?

Other things I keep in mind are diversifying within my portfolio and making sure I keep my profits and losses consistent, using a stop loss.

Once again, these principles are only a guide and are no guarantee, but they are principles that I myself find fairly reliable.


The sharemarket game is back!

Yep, the House of Wealth Share Trading Game is back. Yay! It will be commencing on Thursday the 11th of March, just after the long weekend. So come on guys, take the challenge and play against us and other clients, there is a prize for the winner!

If you’re interested in participating please email me here and I’ll give you the Rules and Registration handout to get you started. It’s great fun and helps build your share trading skills. Last time, our very own Dave won with a total networth of $25,243, a great effort after starting the game with $20,000, over 25% return in just ten weeks.

The average score for all players was about $22,000 – making an annualised return of 64% across the board. Think you can do better than that? Or you're really not sure, but think it could be fun to try? Come and play - you know you want to!


Finding value in the share market

Most investors are always looking to find value in the share market, and though every investor has their own way of picking “hot stocks”, I’m going to have a quick look into a couple of simple and popular ways of looking for value in companies.

These are the Earnings Per Share (EPS) figure and the Price to Earnings Ratio (PER or P/E ratio). As the P/E ratio of a share is dependent on the EPS I will start by explaining the EPS.

In theory this is how much share of a company’s profits you have. It is calculated by taking the after tax profit for a company and dividing it by the number of shares on issue.  Another good measure of how a company is performing is to analyse the EPS growth from year to year.

The P/E ratio often then used to determine how “cheap” a share is. This is calculated by dividing the share price by the EPS. This, in theory, gives the earning power of a share relative to its share price. Shares with extraordinarily low P/E ratios are often considered to be undervalued (or in trouble!) and shares with extraordinary high P/E ratios are often considered to be overpriced. Usually, you would compare the P/E ratio for a company to other similarly-sized companies in the same industry.

Note these figures are theoretical measures only and they do not necessarily determine how a share will perform. This is a site that can be quite useful for company analysis if you are looking for one, but there are many more out there.