This week concludes our short series on common mistakes made by investors, starting with:
Not understanding taxation: I have had many enquiries over the years from investors who think their investment bonds are tax-free. They aren’t, of course, as tax is deducted at source each year by the provider of the bond.
These bonds are unable to make use of the annual capital gains tax allowance which can provide other investments with up to £10,900 of tax-free gains per annum.
Not measuring performance: When we meet with a new client and perform an investment audit, we often find that they are unaware of exactly how their investments have performed over the years when compared to the rest of the market.
If you don’t measure performance, then you don’t know how well you are doing, and if you don’t know how well you are doing then you don’t know what is working and what isn’t.
Not measuring risk: Volatility measures the size, speed and zig-zag of investment performance and all investments have a volatility number. The higher the volatility number, the higher the risk. And the lower the number, the lower the risk.
A good investment portfolio will have a lower-than -verage volatility and a higher-than-average return.
A risk that is often ignored is inflation. The UK currently has a low rate of inflation with CPI at 1.9 per cent and RPI at 2.8 per cent; however many cash ISAs are paying less than 1.5 per cent interest. This means that money in cash ISAs are losing value on a daily basis, which over a long term can significantly destroy wealth.
Sticking with bad investments: It makes sense if an investment is bad that you should get rid of it, yet many people do not. Often people are told “investing is for the long term so stick with it”. Research has shown that more than 70 per cent hold on to bad investments. This can be simply be because they are told to keep it, or because they believe it is too expensive to change, but often the reason is that the investments haven’t been properly reviewed.
David Hill is a Chartered Financial Planner and Independent Financial Adviser at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814 or by email: firstname.lastname@example.org