3 investment mistakes to avoid in a recession
Finance expert Ted Richards takes us through some key investment lessons he's learned – and how you can apply them during a recession.
In my previous career, I was a professional AFL player. Some professional athletes aren't renowned for their financial decisions and I thought some of the conversations I heard about investing mistakes were unique to the locker room. However, since retiring from football, I've realised that's not the case.
I now work in investment management and I see the same financial missteps being made time and time again. As we assess our lives in pandemic times – and prepare for the impact of a recession – it's a good time to take a fresh look at our finances, learn from the past few months and think about how to avoid these issues.
So, here are some common mistakes to avoid during a downturn.
1. Don't dive straight in without a plan
I've seen people choose and execute apparent long-term investment decisions within a matter of minutes. However, the same people will spend weeks or more researching less important decisions such as which phone plan to select. I bet you that you know more about your current phone plan than you do about your superannuation account.
There is a great quote I like to share with people when talking about planning: "Give me six hours to chop down a tree and I will spend the first four sharpening the axe." My point here is: if you jump straight into investing without any form of plan, you're hacking away at a tree with a blunt axe.
A proper plan will take into account your investment horizon and your risk appetite. Don't assume you have the same tolerance for risk as someone else. Your investments need to pass your own sleep test because, if they don't, you won't last very long. There are now online providers – like Six Park, where I work – that can provide you with a plan to get you set up with a diversified investment portfolio that matches your risk profile.
So, do your research and find an investment strategy and platform that factors in your goals, risk profile and finances.
2. Don't try to predict the future
After the 11 September terrorist attack (in 2001), we saw two behavioural changes:
- People started driving more and flying less
- Many assumed we'd never fly at the same levels we did before the terrorist attack.
Both made complete sense, right? Well, what ended up happening?
Even though people viewed driving as being far safer than flying, the number of deaths on US roads significantly increased. And, in time, people no longer viewed flying as such a big risk, so flying behaviour reverted to usual levels.
My point here is that trying to predict future behaviour is incredibly hard. Investing is no different – most professional fund managers who try to predict future behaviour by actively picking stocks usually underperform their benchmark.
So if the evidence suggests a professional is unlikely to be able to pick the companies that will outperform the market, what makes you think you can?
An alternative is to invest in ETFs and index funds, diversifying your investments and to focus on time in the market rather than trying to time the market.
3. Don't let your emotions overwhelm you
I was lucky enough to buy a property at the end of 2007. I was very fortunate that my football career could help me achieve this and it's not lost on me that the property market is out of reach for many. Six months after my property purchase, the 2008 Global Financial Crisis hit. I had only just moved in and the property was already dropping in value (and the debt I was servicing certainly wasn't).
At times, I thought that I'd made a financial decision that I'd regret for the rest of my life. I needed to constantly remind myself that I'd made a long-term investment and that monthly price movements shouldn't change my strategy. Over time, the value returned and the power of compounding returns kicked in.
A long time has passed, but I still remember the feeling of loss vividly. However, with the benefit of hindsight, many people look back at the property market in the middle of the financial crisis and all they see is a great investment opportunity.
This experience makes me think of recency bias, which is our tendency to place greater emphasis on recent events than what has happened in the past.
Right now we're going through a global pandemic with COVID-19. Many people probably may think that this could be the worst time to invest, but who knows? If you're a long-term investor, at some stage in the future you may look back on these times and be grateful that you started an investment.
Many people think investing is all about rational, financial decisions when comparing and analysing numbers. But investing is much more than this. There is a strong behavioural dimension to investing, and this can lead to some pretty serious mistakes when emotions take over. If you don't acknowledge this emotional aspect of investing, you may end up being your own worst enemy.
Over the course of my football career, when the game plan was changed mid-game, it usually resulted in a bad outcome. Investing is no different.
Create your plan with careful research and, most importantly, stick to it.
Podcast: Ted Richards on the risks of emotional investing
Disclaimer: The views and opinions expressed in this article (which may be subject to change without notice) are solely those of the author and do not necessarily reflect those of Finder and its employees. The information contained in this article is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort. Neither the author nor Finder has taken into account your personal circumstances. You should seek professional advice before making any further decisions based on this information.
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