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This is my 20th year as a financial adviser. Over the two decades I have spent advising clients, I have seen many foolish things (and done a few myself). Here are the 10 most common financial mistakes people make. With April Fool’s Day approaching, they may serve as a useful warning.
1. Jumping on bandwagons
A few months after I qualified, Lastminute.com floated on the London Stock Exchange. Nearly everyone I knew was buying the shares. They were placed at 380p and immediately shot up to 511p. It was the height of the dotcom bubble. A few weeks later, the bubble burst and the price tumbled.
More recently, we’ve seen a similar story with bitcoin. If you bought into the cryptocurrency in December 2017 and still hold it today, you will have lost 80 per cent of your investment. Never fall for hype.
2. Investing in stocks because they are suddenly cheap
It still amazes me how many clients want to buy shares that have fallen heavily because they think they must now be a bargain. At the moment, it is typically one of the UK retailers pummelled by the Amazon effect. Just because you shop there and like their jumpers does not make them a good investment. Your investment is in danger of unravelling further.
We saw this during the financial crisis when people grabbed stocks such as Northern Rock or RBS after they had fallen 50 per cent on the grounds that they could not tumble further. RBS went down by 90 per cent, and Northern Rock stock was worthless at the end.
3. Being too nervous to invest sensibly
The Financial Conduct Authority recently highlighted concerns about the number of people that take their 25 per cent tax-free pension lump sum and simply stuff it in cash “to be safe”. It is not safe, and many pensioners risk running out of money as a consequence.
With inflation outstripping cash Isa returns by about 2 per cent, your £100,000 lump sum will fall to just £81,790 in real terms over 10 years. If you’re worried about equities, calm yourself by thinking about the incredible power of dividends to alleviate market turmoil.
In the past year the FTSE 100 has made zero share price gains in aggregate, but has kicked out a 5 per cent return from dividends. The Barclays Equity-Gilt study shows that over the past century, equities have delivered on average 5.1 per cent annually in real terms. That is enough to turn your £100,000 to £164,447 in a decade — twice as much as leaving your money to rot in that cash Isa.
4. Falling for a sucker tease
Lots of people open a savings account for a headline-grabbing interest rate, but then leave it in there as the rate is quietly reduced. Don’t have time to shop around? We suggest clients invest in NS&I products. They may not offer the highest return, but are consistently near the top and backed by the government.
5. Ignoring pensions
Too many people ignore pension saving because they do not fully understand it. Yet they are missing out on a government tax uplift that for those earning between £100,000 and £123,700 is worth the equivalent of 60 per cent (the marginal tax rate on this band of salary is higher, as the personal allowance starts to taper away above £100,000 of earnings).
Over the years, many people I’ve advised have thought — incorrectly — that a pension can only be organised by your employer. But it is easy to invest privately via a Sipp (self-invested personal pension) and still get the uplift.
Worse, I’ve met people who have opted out of their workplace pension because they do not like seeing money taken from their salary — they are missing out on both their employer’s contribution and the government top up.
6. Insuring your phone but not your life
I often meet younger couples who have insured their phones, their boiler — even their washing machine — but not their life. A 30-year-old can get £100,000 of cover for less than five pounds a month. Phone insurance often costs twice that. You are the most valuable thing in your house and if your death would jeopardise your family’s financial security, take insurance seriously.
7. Making stupid decisions to save tax
I have a problem with investors who let their aversion to paying capital gains tax (CGT) adversely influence their investment strategy. Paying CGT is a wonderful thing. It means your money is growing. Losing 20 per cent of something is better than saving 100 per cent of nothing.
8. Fretting and dabbling
Online supermarkets have been great for bringing down costs, not to mention convenience and transparency, but many investors go online every day to see how things are going. I wish they could put their money in a well-diversified investment and not look at it for several years.
If you had done that in 2006, fallen into a coma and come round in 2011, you would have seen your portfolio and said: “That’s OK.” You would have missed the crash and not noticed it in your returns. Looking too often encourages you to worry unnecessarily and overtrade — buying and selling at the wrong time, and paying the platform for the privilege.
9. Greed, not need
I am shocked by how many people get stung by investment scams offering 10 per cent risk-free returns or are drawn into complicated tax-dodging schemes. If it sounds too good to be true — it is.
If an offer cannot be explained in 30 seconds, avoid it. And if a tax adviser has found a wheeze to help you avoid taxes that everyone else pays, it is magic beans. You could find yourself in court years later, paying an even higher price. Focus on sensible tax planning and getting the returns you need on your investments. And when you achieve that, be happy. There will always be someone who has made more than you have, but dwelling on that will make you miserable.
10. Scrimping on the cost of advice
I can sense your eyebrows raising — a financial adviser saying that it’s worth spending money on advice — but hear me out. People often think the cost of financial advice is going to cripple them. It is not cheap, and is out of reach for too many. However, there are still lots of people who can afford it, and who do not realise they cannot afford to do without it. Over the long term, good advisers should save their clients more than they cost.
Michael Martin is a relationship manager with Seven Investment Management (7IM). The views expressed are personal. Twitter: @7IM_MichaelM
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