February 11, 2021

2 min read

Investment and Life insurance

The biggest mistakes people make when investing money
…listen to us investment people.
Nicholas Flaherty Image

Nicholas Flaherty - Investment Strategist - FWU Invest S.A.

Investing is not an easy business. But of course, we would say that as we are investment people! Nevertheless, there are numerous mistakes that we have witnessed people committing again again, proving to be often hugely detrimental to their wealth. Let’s have a look at the three biggest mistakes we’ve seen people commit.

1.
Not wanting to invest in the equity market

It is totally understandable to be concerned about investing your hard-earned money into what you perceive as very risky, but nevertheless, the opportunity cost of not being in the stock market can be very large. What we mean by opportunity cost is the ‘what if’; the missing out on returns that you could have had. Since the financial crisis, for example, a diversified global portfolio has returned more than 340%, while having money in a bank account has gotten you close to zero.

2.
Failing to diversify

This mistake, we’ve seen time and time again and it can be extremely bad for your money. Japan gives us the perfect example. A Japanese investor who started investing in the early 1990s and only invested in Japanese equities would have experienced an enormous market crash and a prolonged economic slump following it. This investor would, to this day, still not have positive returns – in fact close to 20% down! On the other hand, if this same investor would have invested globally at the same time, he/she would have benefitted from the likes of the rise of China and other emerging markets and the bull market in US technology companies – leading to a rise of many multiples of the initial investment.

3.
Trusting the ‘gurus’

It is a natural human instinct to want to trust ‘experts’; it gives a sense of comfort that our money is being managed by someone who really knows what he/she is doing and who is trustworthy. The problem is that in finance, there are a lot of people (usually men) masquerading and using sales skills to convince people to invest with them, while they often do not have the skills and many of them are also not trustworthy. Bernie Madoff is the perfect example – many investors lost their life savings due to him. The point here is that you should not listen too much to ‘superstar’ investors; they are most likely much better at selling themselves than they are at actual investing.