Perhaps you unexpectedly received an inheritance or had your pension fund paid out... Perhaps you realize that at the end of the month you regularly have more left over than you have spent and your savings have added up. Then the question arises: to invest or not to invest? And if so, what should you pay attention to? Here is a list of the 10 most important mistakes you should avoid.
We have updated this article, originally published in 2019, in 2023.
1. Unrealistic Goals
Investment expectations must be adjusted to the state of the financial markets. For years, there has been hardly any money to be made with fixed-interest securities (bonds). It is therefore clear that no returns can be achieved without taking risks. Even if someone brags about the 20% return he claims to have achieved, it must be clear that this was only possible by accepting significant risks and that he probably lost 20% or more in another year. If someone offers you the prospect of returns of 10% or more, you can assume that the offer is dubious.
2. Overestimating or Underestimating Your Own Abilities
An astonishing number of private investors think they can beat the professionals. They look for hot tips and take risks. This can turn out well or badly. Good results are attributed to their own abilities and bad results to "the markets". On the other hand, there are far too many people who are not interested in financial markets and do not invest their money at all due to a lack of expertise. These people have to watch as their savings are slowly being eroded by inflation. You don't have to be a financial professional to invest money. For beginners, there are mixed investment funds, so-called portfolio funds, which replicate investment strategies. If you want to invest more money, look for a skilled wealth manager.
3. Overestimating or Underestimating Your Own Risk Capacity and Tolerance
Your own risk capacity depends primarily on how long the amount to be invested will not be needed. The longer the investment horizon, the more risks you can take. Risk tolerance, on the other hand, indicates how much risk you feel comfortable with. The best measure of this is the loss you are still comfortable with. If 10% losses throw you off balance, your risk appetite is low. However, if you still sleep well even with 30% losses and are confident that the losses can be recovered by the end of the investment horizon, you probably have a high risk appetite. If you underestimate your ability and willingness to take risks, you are giving away returns. If you overestimate them, you will become restless in volatile markets and run the risk of selling your investments at the worst possible moment.
4. Greed and Panic
We humans have a tendency to succumb to greed and panic. When we hear that someone has increased their wealth tenfold with bitcoins, we want to do the same and possibly take irrational risks. When the markets are plummeting and we read everywhere about recession and crisis, we tend to panic sell. Investing money requires a steady hand and a certain degree of self-control, i.e. you must not let greed or panic tempt you into rash actions.
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5. Incorrect Assessment of the Timing for Market Entry
Stock markets reflect the earnings potential of companies in the future. Since we don't know the future, we rely on our judgements, which can turn out to be right or wrong in hindsight. One common mistake is not investing: In recent years in particular, many savers and investors have refrained from investing (more) funds because they believed the markets were overvalued and thus gave away a lot of returns. Conversely, in phases of uncertainty with low entry prices, the fear of further price losses is also so high that the good entry point is usually missed. If you have a sufficiently long investment horizon, you can actually get in at any time. If the markets are highly valued, it is possible to invest in tranches and thus reduce the risk of the wrong entry point.
6. Too Little Attention
If someone has little desire or time to actively manage their own investments, a wealth management mandate is the right choice. However, this also requires a minimum level of attention. If you don't pay attention, you can expect your own wealth manager to achieve below-average returns for years without you realizing it. And when you realize it, you need to overcome this and make the required change. Most investors shy away from the effort (which is often considered excessive).
7. Blind Trust
It is necessary to be able to trust your financial advisor. However, it is just as important to always remain critical and form your own opinion on the adviser's proposals. If you don't do this, you run the risk of being taken advantage of, for example with complicated products with high hidden costs. Never invest in something you don't understand, because the more complex a product, the more likely it is that high margins have been factored in for the provider.
8. Insufficient Cost Awareness
In most areas of life, we are used to prices being fixed. It would never occur to us to want to negotiate the price of a tube of toothpaste at a supermarket. The situation is different with investments. Many providers work with "shop window prices" that hardly anyone pays. So if you don't inform yourself about the market prices, you may be one of the few customers who pay the exorbitant official prices. The more money you invest, the greater the room for negotiation. Going into a negotiation round uninformed is certainly not a good idea. At this point, we would like to refer you to our article with information on Prices in Private Banking.
9. Giving In to Impulses
When investing, it is important to question your own impulses at all times. If someone tells you that Nestlé shares will continue to perform well because people will always want to eat and drink, it is an understandable impulse to believe this and buy the shares. But before you invest, you should also look at the share's price/earnings ratio to make sure you're not paying too much for this fundamentally positive outlook. Or if you think that property is a stable investment, you should be aware that, depending on the market phase, you may pay up to 50% more when buying a property fund than the properties held by the fund are actually worth (known as the premium). If you invest only in a few companies that you strongly believe in, you run the risk of taking on unnecessary cluster risks due to insufficient diversification. Financial market research has clearly shown that focusing on just a few securities leads to a sub-optimal risk/return ratio.
10. Careless Choice of Wealth Manager
Probably the most important decision is the choice of bank or independent wealth manager for your investments. However, a systematic, fact-based selection hardly ever takes place. Instead, people usually turn to a provider where they know someone or invest their money with the bank where they already have their mortgage. Investors should be aware of what requirements are important to them and then choose according to their needs. Fortunately, thanks to the independent and free support of FinGuide, this is no longer a problem.
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Matthias Hunn
Founder FinGuide AG
With more than 30 years of experience in the Swiss financial business, Matthias Hunn founded FinGuide AG in 2017, which provides private clients with reliable and professional support in selecting the best provider for wealth management.