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5 Most Common Investment Mistakes

 

If someone tells you they can guarantee 10 per cent returns for the next 20 years, tell Bernie Madoff to get back in his cell. Steer clear of his investment advice and these common mistakes to protect yourself against bank balance abuse

1. Forget to make an exit strategy before investing
Warren Buffet once stated that the best holding period for any asset is “forever”. Whilst this may be true in principle, in reality, most of us invest to achieve a specific goal or objective and, as such, an exit strategy is vital. Once your objective is achieved, exit the investment – don’t be tempted to wait for that extra few per cent … and obviously don’t monitor it after you exit!
– Eric Mellor, International Financial Services

2. Use foreign currency mortgages
Foreign currency mortgages are potentially very dangerous, and have the ability to wipe out a lifetime’s worth of savings. Even currency traders have got this one wrong. If you own a property in one currency, but a mortgage in another currency, then you have added on another level of risk. Currency markets can quickly move against you, and if it does, the bank will be quick to give you a margin call to protect its own position. Foreign currency mortgages should only be used in special situations.
– Colin Purchase, The Henley Group

3. Peg one company’s share price to another’s
Every company has a unique set of circumstances underlying its prospects, but to better understand them, investors like to draw analogies and apply certain factors that compare one stock to another. This technique is perfectly useful when assessing an issue like commodity costs, which should affect a group of competitors in a given industry similarly. However, investors can get carried away with these comparisons, and often use them mistakenly.
– David Francis, Portfolio Builders

4. Give little thought to tax
Being an expat opens up various tax opportunities (depending on nationality and future residency). If these are missed, then larger tax bills could be incurred further down the line. Money saved through tax planning is smart money. Money paid unnecessarily in tax is not so smart.
– Colin Purchase, The Henley Group

5. Over-diversify
The basic principles of investing tell us that diversification is a good thing. Buying pairs of negatively correlated assets (assets that move in opposite directions), reduces overall portfolio risk. Whilst this is true, it also reduces overall portfolio return. If one asset grows at five per cent while another asset held in an equal proportion falls, the net return is zero. The key to reducing risk is to hold a combination of both growth assets and “defensive” assets. Partially diversify the risk, not the potential return.
– Eric Mellor, International Financial Services

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