1. Waiting for the right time
There’s a popular Chinese proverb that says, “The best time to plant a tree was 20 years ago. The second best time is now.” People new to investing know the stock market is a good place to invest. Why? Because they know of a friend who knows of a friend who made money, that one time.
But they don’t understand what it takes to build wealth - patience, consistency and more patience. Don’t spend time agonizing over individual stock picks , instead, build a well diversified portfolio with an overall risk profile that you can live with. Start investing as soon as you’re eligible and financially capable. You can always make changes.
The stock market has its ups and downs, but rookie investors get tense when the stock market is rocky. They may be tempted to buy when prices rise and sell when they fall.
They may be tempted to check their portfolios too often and panic at any sign of perceived market volatility. As Peter Lynch famously quipped, “It’s time in the market, not timing the market that matters.”
2. Going all-in on one stock
Okay, so what’s wrong with investing in a single stock? Surely you know the saying don’t put all your eggs in one basket?
For beginning investors, trying to outperform the market by buying individual stocks is a top mistake. That approach carries a lot of risk because, when the stock turns sour, newbie investors have the tendency to hold off investing, forever. If it does work out, they overestimate their stock-picking abilities and make even larger single-stock bets.
Whether it’s large, blue-chip companies, such as Disney or Apple or lesser-known firms the investor thinks will pay off in the future — this can definitely eat up valuable time that could have otherwise been spent learning about investing principles that actually provide some value.
Investing is all about minimizing risks. Another downside to investing in only a few single stocks is that when they make a negative turn you may find it difficult to get out of the positions. Hyflux anyone?
So what, then?
The better play is learning about investment strategies focused on sectors, diversification or asset classes. It will be much more helpful.
Diversify, diversify, diversify! With an investment portfolio spread over many different securities, you can benefit from minimizing your risks while generating good returns. So even if one portion of your portfolio isn’t doing well, other areas can make up the difference. Diversification can help you to manage risk and reduce the volatility of your portfolio.
Remember, however, that no matter how diversified your portfolio is, risk can never be eliminated completely. You can reduce the risk associated with individual stocks, but general market risks affect nearly every stock and so it is also important to diversify among different asset classes and geographies. The key is to find a happy medium between risk and return. This ensures you can achieve your financial goals while still getting a good night's rest.
3. Not asking about fees and hidden charges
Robo Advisors often lead their marketing efforts with “Low Fee” claims. As more investors turn towards Robos, failure to fully understand their fee structures can result in a huge drag on your portfolio. Too few people actually ask for a full breakdown until they before investing with a new advisor – robo, or traditional. Do you know what you are paying to invest?
Hidden Fees through long investments periods will affect how much you earn over time. Remember those old investment legacy plans? With the amazing management fees which provided close to zero gains for the first five years. Did people really buy those? Sadly, yes.
Have you ever wondered how some financial advisors show a low headline fee? It’s because their additional charges come in from other areas such as:
Ticket charges when executing trades
- Conversion of Currency
- Custody or “safekeeping fees”
- “Exit fees”
- And many more
A breakdown in difference of fees you pay a year, if you look below you’ll see an annual chart on how much additional fees you’ll be paying:
Okay, you might be lost by now but let’s break it down:
So, adding up the numbers, with Robo Advisor B you’re effectively paying 1% (upfront fees, *buy your investment fees, **currency conversion, ***safekeeping fees) for your first trade in a year, and paying an additional 0.6% for your investments over the next 12 months.
What this means is that if you start with an investment of $20,000, with Robo Advisor A you’ll be paying a flat 1% in fees which is $200 vs Robo Advisor B 1.6% which is $360 in fees per year.
Having a transparent fixed annual fee on all your investments would eliminate your worries about additional hidden fees that you may incur.
Would you want to pay additional fees? Heck no.