The 7 bad financial habits you must break...

WHEN it comes to investing in the stock market, the British public have never had it so easy. But being able to invest and building a portfolio that’s made to last are not the same thing. Investors who put their faith, and the vast bulk of their long-term savings, in fund manager Neil Woodford’s hands have learned this lesson to their cost.

Yet DIY investors make errors of judgment all the time. According to a new report by wealth manager Quilter, investors are habitually making mistakes that are compromising their long-term wealth.

Here are the seven habits you need to break.

1 FAILING TO DIVERSIFY

DIY investors typically hold no more than seven shares, according to Quilter, whereas a broadly diversified portfolio should comprise some 30 holdings, thereby decreasing risk.

Holly Mackay is chief executive of personal finance website Boring Money. She says: ‘Lots of people inherit shares, or have held a few big brand names for years. This doesn’t give them a good spread of holdings and risks them having all their eggs in one basket.’

Mackay says moving shares on to an investment platform gives investors access to funds which tend to hold a spread of equities.

For help choosing a platform, visit boringmoney.co.uk/best-buys.

Jason Hollands, of wealth manager Tilney, also suggests diversifying the number of funds held and not becoming too reliant on one favoured fund manager.

He says: ‘As a rule of thumb, try not to have more than 15 per cent of an investment portfolio with any one single fund manager.’

2 TOO RELIANT ON THE UK

MANY investors tend to show a bias for home, investing predominantly in UK equities. But depending on one stock market is not advised.

So investors should spread their money across markets. An easy way to do this is through a global fund where the manager decides which markets and companies to invest in.

3 NOT SPREADING MONEY AROUND

THOUGH savers typically hold too few shares, they hold even fewer assets that aren’t equities – such as bonds, property (funds that invest in the shares of property companies, for example) and commodities (such as gold, coffee and crude oil). Hollands says: ‘Numerous studies show that asset allocation is a bigger driver of long-term returns than the funds selected. Although professional investors understand this, DIY investors have a habit of diving into the deep end and trying to pick funds or shares without thinking about the overall spread of their investments.’

Mackay suggests multi-asset funds as a way of accessing a global mix of investments. They spread money across shares, cash and bonds (fixed income IOUs from companies or governments).

She adds: ‘Multi-asset funds bring together different investments from around the globe into one single product. Have a look at Vanguard, L&G or BlackRock for decent mainstream options.’

Hollands points out that DIY platforms also often overlook investment trusts and exchange traded funds. The former can reach into markets in developing countries as well as harder-to-sell asset classes like property and unlisted stocks (those not listed on a stock exchange). Exchange traded funds on the other hand are a low-cost way to track a multitude of different markets and make it easier to own assets like gold.

4 TINKERING TOO OFTEN

PEOPLE who feel the need to always be doing something are prone to ‘overtrade’ – constantly buying or selling funds and shares.

The penalty for this behaviour is multiple transaction costs.

Rick Eling, investment director at Quilter, says: ‘A lot of people think they need to be super clever and know something about the market that no one else knows – like a clairvoyant – and that they need to be quick.

‘But that’s not what investing is – it’s far more boring. It is about managing emotions and behaviour. Thinking long term.’

5 PANIC SELLING WHEN WORRIED

JUST as overtrading is considered poor technique, so is getting into a flap and selling when panic strikes.

Successful investing sometimes boils down to stomaching a rollercoaster ride. Eling says: ‘You need a plan and to have discipline. If you really are making a 20-year investment for your retirement, you shouldn’t care what a share price is doing over the next three days or months.’

He adds: ‘Investing is hard work – not because you need to be clever, but because you have to put up with uncertainty and focus on the future.’

6 FAILING TO ‘REBALANCE’

SAVERS often choose new investments as standalone decisions, rather than as a complement to their existing portfolio. Any original objective is then set adrift.

Hollands says this approach causes investors to gravitate towards ‘hot’ funds and sectors. Over time this means assembling ‘a museum of previously tipped funds’.

‘Yesterday’s “star funds” can crash out of orbit,’ adds Hollands, a reference to Woodford’s recent crash and burn.

‘Successful managers change jobs, burn out or retire, so a meticulously planned portfolio will – like a manicured garden – need regular weeding and pruning.’

Advisers recommend reviewing a portfolio at least a couple of times a year, holding a mix of fund types, investment approaches and managers.

7 BUYING BECAUSE OF HYPE

HERO-worshipping fund managers is a recipe for disaster. Look no further than the Woodford crisis for proof.

Investors are heavily influenced by ‘best-buy’ lists and hype around renowned fund managers. Boring Money says DIY investors rarely credit best-buy lists as a reason for choosing a fund. But data collected from investment platforms suggests more than a third of fund purchases are best-buys.

DIY investors can be successful if they balance investment risk, are mindful of costs and choose a breadth of funds and shares.

Further guidance about investing can be found at moneyadviceservice.org.uk.

Those lacking a coherent financial plan, or who feel investing is a chore, should consider appointing a wealth manager.

Alternatively, use an independent financial adviser. Search for one using the website unbiased.co.uk or The Personal Finance Society’s ‘find an adviser’ tool at thepfs.org/ yourmoney.