The 5 biggest investing mistakes I’ve made

Being an investor who started from almost zero knowledge, I’ve made plenty of mistakes. Let’s have a look at the biggest investing mistakes I’ve personally made and what I’ve learnt from them.

1. Over-diversification

As a beginner investor I was guilty of putting money into almost everything an investor could get their hands on. I invested a little bit here, and a little bit there (but without any real strategy), with the intention of diversifying my portfolio more and more.

My investment in funds was probably the worst in terms of over-diversification – I had invested in around 17 different funds on InvestNow at one point. My investments outside of InvestNow weren’t any better. I had spread my money across 4 different Peer-to-peer lending platforms (Squirrel, Lending Crowd, Harmoney, RateSetter), and 3 share broking platforms (Direct Broking, Stake, NABTrade).

What I’ve learnt

All of these funds and platforms only increased the complexity of my portfolio, while not adding much diversification. Signing up to an ASX broking platform just to buy that one Australian share isn’t going to add much additional diversification to an already diverse share portfolio. The only thing it’s going to add to your portfolio is more fees, taxes, and time required to manage it.

These days I’ve sold off most of my excess investments and stick to a simple strategy of investing in 3 funds via InvestNow, a portfolio of individual NZX shares, and P2P lending through Squirrel. I’m no longer tempted by every new investment opportunity that comes up, being confident that my strategy already provides more than enough diversification.

Cost of this mistake: Probably a few hundred in fees + lots of time wasted

Further Reading:
More funds = less diversification? Are you investing in too many funds?
Why I don’t invest in US and ASX Shares

2. Chasing dividend yield

Dividends are tempting for new investors because they provide a regular return, and are an easy idea to grasp (working in a similar fashion to term deposits or savings account which pay regular interest). Unfortunately I have been guilty of being a dividend yield chaser, basing some of my investment decisions purely on how much money I could earn from a company’s dividend payments.

In 2016 I bought shares in New Zealand Refining (NZR), a company I knew almost nothing about, for this very reason. I could earn a net yield of over 5% just from one single dividend payment – surely a no-brainer compared to the 1% or so I could get from the bank right? Unfortunately I had fell into a dividend trap:

  1. Firstly, NZR’s share price declined as their earnings fell over the years, from $3.56 when I bought in, to just $0.68 in mid-2020 when I sold at a heavy loss. I had held on to my poor performing NZR shares for years, hoping that they’d rebound.
  2. Secondly, their dividend payouts gradually fell to zero alongside their earnings. The level of dividends NZR was paying when I first invested in them was not sustainable at all.

What I’ve learnt

These days I consider many other factors before investing in a company, and have focussed less and less on dividends as part of my investing. There is usually good reason behind a company’s dividend yield being high such as limited potential for capital growth, or a decline in share price or earnings. I’m happy to earn a lower dividend if the company I’m investing in has better growth prospects or a higher likelihood of sustaining their dividend into the future.

As for NZR, I should have cut my losses earlier and reinvested what I had left into a more reliable, better performing company.

Cost of this mistake: An almost $2,500 capital loss + the opportunity cost of not allocating my money towards a better investment

Further Reading:
Dealing with Dividends – 5 things to know about them

3. Not having an exit strategy

In almost every case people make an investment with the intention of making a profit. But many do not consider how they’ll realise that profit i.e. when and how they will sell their investment. Will you sell when it reaches a certain price, or will you keep holding them for several years/decades without any specific target? Will you sell all your shares at once, or will you gradually sell down fractions of your holding over time?

Back in October 2015 I had bought shares in Restaurant Brands (RBD) at $4. It was a strong company with plans for lots of expansion, and the prospect of owning a few KFC stores was almost irresistible – a company that would be excellent for holding long-term. Unfortunately I had no plan for what to do with the shares after buying them, and ended up selling them in March 2016 at $4.55 after panicking over the volatility of the shares. Since then the company has continued to perform well with the share price reaching almost $13.

What I’ve learnt

I now make investments with the intention of holding them for my whole life. I’m confident the companies I’ve invested in are high quality, so I stick to that plan even if the company’s share price jumps up and down over the short-term. However, plans can change and I may end up selling off an investment if a company changes enough that the reason I bought the investment for in the first place no longer applies. But at least a solid plan means I’m not chopping and changing my portfolio due to knee-jerk reactions to market movements.

Cost of this mistake: Over $6,000 in potential capital gains + 5 KFC vouchers (RBD gives their shareholders a KFC voucher every year)

4. Being anchored to a particular price

Many investors are too fixated on specific price targets for a company. For example:

  • Just because the price of Air New Zealand shares used to be over $3.00, doesn’t necessarily mean it will go back up to that price.
  • Just because the price of Oceania Healthcare shares used to be $0.40, doesn’t necessarily mean it will go back down to that price.

Companies and the environment they operate in change all the time (for better or worse) and the current share price usually reflects those changes. For example, retirement companies like Oceania have been much more resilient to COVID-19 than anticipated. Therefore the price is unlikely to fall back down to $0.40 as it did in March 2020 – a price that reflected the uncertainty over the impact COVID-19 would have on the company.

During the COVID-19 crash last March, the price of Infratil (IFT) dipped significantly and I wanted to add to my existing holding. The price was hovering around $3.06 and I was fixated on buying some shares at $3.02, at the same price I had bought my IFT shares in 2015. Instead of falling to my desired price IFT rebounded quickly, heading up to $3.10, then $3.20 and beyond. I was too chicken to buy at these high prices, adamant that the price would dip back down towards $3.02. But it never did and I ended up cancelling my order. This is a relatively recent mistake has cost me thousands in returns as the IFT share price has now risen to $7, and shows that even more experienced investors make mistakes.

What I’ve learnt

It’s better to pay a reasonable price for a company, than to be anchored to a specific (and often unrealistic) price target and not end up buying the shares at all. I should have paid $3.10 or even $3.20 for my IFT shares considering those prices were already a bargain, and that IFT held a portfolio of quality infrastructure assets that are mostly resilient to the impacts of COVID-19.

Cost of this mistake: At least $6,600 in capital gains

5. Being too conservative

When I first started investing in shares and funds I was very conservative, leaving large amounts of money in the bank. I was held back by the perception that shares were risky and the media didn’t help at all. Every year since I started investing in 2015 there has been a financial expert predicting a massive sharemarket crash for that year. And every week there are articles about people getting rich off property investment, but it seems that the only time shares make the news is when the markets crash.

It turns out the markets have performed exceptionally well since 2015 and those crash predictions have not come to light. As a result this mistake has been my most costly, having lost tens of thousands of dollars in potential gains by leaving too much cash on the sidelines. Even if a crash did occur, my long-term investment timeframe would have allowed me to ride out the volatility.

What I’ve learnt

These days I better understand the risk associated with shares, and know that they are one of the best performing asset classes over the long-term despite facing regular downturns. I also now know that the so called experts who predict 70% market crashes are wrong most of the time, and are only posting these outrageous predictions to get clicks or views. I now have a portfolio that’s more appropriate for my investment timeframe with the primary asset class in my portfolio being shares. The right asset allocation will be different for different people, so I’d start by obtaining reliable, trustworthy investment information (not from Facebook groups) and using a professional adviser if necessary.

Cost of this mistake: Potentially tens of thousands of $ in capital gains and dividends

Conclusion

I have made plenty of mistakes as an investor and it has cost me significant amounts of money. But I’m ok with that. Mistakes are unavoidable no matter what, as we are all investing the best we can with the knowledge we have at the current time. So when it comes time to realise your own investing mistakes, don’t be too hard on yourself and ensure you learn something from it – it’s all part of the journey towards becoming a better investor.

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Disclaimer

The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with an authorised financial adviser before making any investment decisions.