Learn from mistakes when investing

● Market crashes and downturns are inevitable in any economic cycle. Even great investors such as Warren Buffett and Jack Bogle have admitted to making costly mistakes throughout their careers.

The difference between expert and novice investors, however, is that experts learn from their mistakes and use their insights to improve their processes.

Mistake 1: Don’t trust current data sets without proper scrutiny

Equities have been under pressure for a while, which has skewed the traditional risk-return dynamic in asset classes. Typically, cash is on the conservative end, with lower risk, but also lower return prospects. On the other end of the spectrum one moves to assets like bonds, credit, property and equities that have higher risk and return prospects.

Since equities have underperformed in the short to medium term, we have noticed multiple investors moving their investments from growth assets like equities to more conservative products like cash.

The underperformance of equities has also filtered through to more historic returns in funds, making more conservative mandates outperform more aggressive ones.

Will the next five years look like the past five?

The key question investors should ask themselves now is: “Will the next five years look the same as the past five?” Unless you know with absolute certainty it will, then you should not use current data sets to steer your asset allocation decisions. The best route is to stick to the financial plan devised with a specific goal in mind. You can adjust asset allocations slightly with the guiding hand of a trusted financial planner. The highest risk of a financial plan’s failure is deviating from the plan significantly. When seas are rough the best advice is to go back to your original plan. Are your objectives still relevant? Is your asset allocation mix still optimal to reach your goals? And if not, don’t make drastic changes, tweak it with your adviser’s assistance.

Mistake 2: Excessive changes to asset allocations in portfolios

The mistake is when these changes become too excessive and emotional. For example, when investors move their capital out of equities completely into cash — usually timing the market incorrectly.

While most understand the risks of equities, investors need to understand that cash as an asset class offers the highest risk of not beating inflation.

Periods of underperformance are factored in

Humans inherently feel the need to act when things are not going to plan, but especially in investments you need to realise that a period of underperformance is actually part of the plan.

When we work on 40-year projections for equities, for example, we make provisions for several corrections to take place over this period. We always have a healthy appreciation for the cyclicality of markets and economies, which helps us to incorporate strategies that can even out underperforming periods over the long term.

Do introspection

Mistakes are a natural and valuable part of your learning curve as an investor. Doing introspection and learning from your mistakes, and those of others, can help you trim losses in the future. ✼

Adriaan Pask is the chief investment officer at PSG Wealth. This article was paid for by PSG MultiManagement (Pty) Ltd. FSP 44306. For more information, visit www.psg.co.za.

Even great investors such as Warren Buffett have admitted to making costly mistakes