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Created on 04.09.2019

Investing in funds – the most common mistakes

Investing your money can be a sensible decision. Investors can enjoy higher potential returns in the long run than they would by keeping their money in a savings account. This is because, over the years, investing money can help you accumulate assets. Unfortunately, however, investors often make mistakes that reduce their returns, or even result in losses. In this article, we focus on some of the most common and most serious mistakes investors make, and show you how to avoid them.

Keeping money in your account

A lot of people know it would be a good idea to invest some of their money, but various factors result in them ultimately not doing this. For one thing, there is a certain amount of effort involved, especially when it comes to reading up thoroughly on the topic of investing. Secondly, it is becoming increasingly easy for investors to just stay in their “comfort zone”. The reality is, however, that an investor’s capital will decrease in value over time as inflation rises if it is retained solely in the form of money.

Then there is the compound interest effect. This is even larger for income from securities seeing as these tend to have higher returns than the interest on a bank account. A consistent return on your capital will lead to exponential growth in your assets in the longer term. Here’s a quick example to illustrate this fact: if an investment (after deducting investment costs) yields a return of 3% each year, the value of the investment will double within about 24 years. This increase in value will mostly occur during the last five years as the capital that yields your return will have already grown substantially. The sooner you invest, the bigger your profits in the long return if you achieve a positive return.

Of course, you can never guarantee this sort of consistent return. Still, the past shows us that diversified, long-term investments do pay off. If you keep all your money in your savings account, you will be unable to benefit in this way.

Complex investment products such as reverse convertibles or knock-out warrants

A mistake investors keep making is to purchase investment products they do not understand. Here are some examples:

  • Convertible bonds
  • Knock-out warrants
  • Synthetic ETFs

If these terms mean nothing to you, then you aren’t the only ones. The majority of investors are not familiar enough with these very niche terms.

If you do not fully understand an equity fund or any other financial product, you should not invest in it. There is one very simple reason for this: if you do not understand how the investment works, you won’t be able to judge whether buying or selling at a given time is worth it, or how risky the investment is. This applies to shares, fixed-term deposits and all kinds of funds. Fortunately, things are often not as complex as they seem. If you put in just a bit of time, you can gradually become an investment expert.

Don’t be guided by emotions

Investment decisions are best made rationally and with a long-term view. When it comes to investing, facts alone should be what count. If you are not overly familiar with the financial markets, you would also be well advised to seek professional assistance from an investment expert. The science of “behavioural finance” shows that people also make systematic mistakes that can be avoided. The article “Behavioural finance: making more rational investment decisions” contains more interesting information on this subject.

There’s no such thing as the perfect moment

Many investors wait for the right time, so the day stock exchanges reach a low point when fund units as well as other securities are more affordable. Investors often hold onto their products for far too long, too: they wait for the right time to sell a fund unit or a security, which has been decreasing in value for years. The term for this type of behaviour is “loss aversion”. Investors are reluctant to admit that a security or fund unit will not be worth the purchase price again.

There are various strategies that can help protect investors from losses. A popular method is to invest small amounts regularly over a longer period of time. In the long term, this produces a steadier average price. At PostFinance, this product is called a “funds saving plan”, and is similar to a standing order. A fixed sum is invested into a chosen fund periodically, which helps minimize the risk of a “poorly” timed investment. There are many different ways you can start investing.

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