Discover the most common investment pitfalls and how to make sure you don’t fall into them

Even top investors like Warren Buffet make mistakes.
As in many areas of life, our emotions often get us into trouble. Market shifts can lead people to make emotionally driven decisions or chase quick wins.
That’s why it’s best to put a well-thought-out strategy in place before you invest your money.
It saves you time and you also need to be willing to learn from your mistakes.

It’s even better to learn from the mistakes of others, as it prevents you from making them yourself. This guide to common investment pitfalls will help you spot potential flaws in your investment planning and take steps to avoid problems later down the line.

1. INVESTING WITHOUT A CLEAR GOAL
Some investment schemes incentivise people to chase short-term gains without having a clearly defined strategy in place, but this is a big mistake. You need to take the time to set out your long-term goals first.

This means setting goals that go beyond short-term thinking like “make more money”. Instead, decide what the long-term aim of your investment strategy is – are you investing for retirement? A house? Are you trying to gain passive income? How much money do you need to hit each goal?

Once you know what you’re aiming at, then build a strategy that’s focused on reaching those long-term goals.

Let’s say you’re trying to save for retirement. You work out that £40,000 per year will be enough to cover your living expenses. You can apply a common rule of thumb that allows you to withdraw 4% of your retirement savings per year in retirement. Simply divide the yearly total needed by 0.04, e.g. 40,000 divided by 0.04, and it indicates that you’ll need a portfolio of £1 million.

2. EXPECTING UNREALISTIC RETURNS
Don’t expect sky-high returns right out of the gate. You’ll just get frustrated when reality doesn’t match your expectations.

You might see stories of people making huge gains in crypto or doubling their money overnight on a “hot” stock. But for every success story, there are dozens of investors who lose on these schemes. You should look to avoid crazy risks when investing, as it could be seen as a form of gambling.

Instead, opt to consistently invest in traditional markets with a diversified portfolio. Historically, the stock market averages about 7 to 10% returns each year after inflation. Some years it’s higher, some years it’s lower, but over time, that’s the ballpark increase. If you consistently average an 8% return each year, your money is likely to double every nine years.

Let’s say you start investing at age 35 with £10,000 and contribute £500 per month into an index fund. With an 8% return, your money will grow like this:

• 10 years later (age 45): approx. £95,000
• 20 years later (age 55): approx. £286,000
• 30 years later (age 65): approx. £730,000
  That’s the power of compounding – investing steady amounts over a long period of time, which adds up to a big pot of money at the end. Trust the process and focus on steady, long-term growth.

3. TRYING TO TIME THE MARKET TO BUY AFTER A CRASH
If you hear there’s a market crash on the way, you might be tempted to pull out your money and wait for the bottom to buy back in. It sounds like a smart strategy, but in reality, it’s a losing one.

Even professional traders get it wrong. You think you’re buying during a dip, then suddenly the market drops even lower. Or you might leave it too late, and prices shoot back up. Research shows that if you miss just the 10 best days in the market over a couple of decades, your returns are cut in half.

That’s why it’s best to invest a fixed amount each month with long-term consistency, a strategy known as “dollar cost averaging”. Don’t worry too much about what the market’s doing on a day-to-day basis or even year-to-year. Some of your investments will be high, some low, but over time it will all even out and you’ll make gains. Slow and steady wins the race.

4. SELLING LOW & BUYING HIGH
Most amateur investors use a losing strategy. They buy when the market is hyped up, then if the market crashes, they sell off their stock. In a downturn, the best strategy is simple – just sit tight and wait it out. Downturns are just a normal part of the markets.

• 1929: The Wall Street Crash, leading to the Great Depression.
• 1973-1974: Stock market crash following the oil crisis.
• 1987: Black Monday, marked by a significant one-day market drop.
• 2000-2002: The Dot-com Bubble burst.
• 2008-2009: The Global Financial Crisis.
• 2020: The COVID-19 pandemic-induced crash.

What happened after each of these downturns? The market recovered. Sometimes it takes longer than expected, like post-Great Depression, but it always recovers eventually.

5. PUTTING ALL YOUR EGGS IN ONE BASKET
Let’s say you invest in the stock of 2 or 3 big, well-known tech firms. You think it’s a safe bet because they’re market leaders – companies that seem too big to fail.

That’s exactly what people thought about Kodak, Blockbuster, Nokia, or MySpace before they fell from grace. Any business can fail due to market shifts, fierce competition, or poor strategic decisions. That’s why you should diversify your investment portfolio to protect yourself.

• Invest in different asset classes: Stocks are good investments, but consider adding real estate, bonds, alternative investments, or managed futures.
• Spread across industries: Tech might be booming, but energy, healthcare, transport companies, and consumer goods balance things out.
• Use ETFs or index funds: Instead of betting on one stock, buy a fund that spreads your investment across dozens or hundreds of companies.

Try to manage your risk in a way that’s sensible, without playing it too safe. Aim for growth but position yourself so that if one sector takes a big hit, you won’t get wiped out.

6. IGNORING FEES THAT EAT INTO YOUR RETURNS
If the market is growing, but your portfolio isn’t growing as fast as you thought, it might be because you’re paying too much in fees.

Even a 1% annual fee can cost you thousands over time. Say you invest £100,000 and get an 8% annual return, with a 1% fee you’d have about £761,000 after 30 years. With a 2% fee, you’ll only be sitting on £574,000.

If you want to avoid excessive fees, stick to low-cost index funds or ETFs. If you’re actively trading, then check your brokerage fees as some platforms charge per trade, while others have annual account maintenance fees.

Be wary of financial advisors who earn large commissions from high-fee products, as they may prioritise their earnings over your best interests. Instead, choose an independent advisor who offers unbiased advice and focuses on what’s best for you.

7. OVERTRADING
Some investors constantly buy and sell stocks, thinking they can outsmart the market. They have a mistaken belief that trading often will maximise their returns. In reality, overtrading often does more harm than good.

Research indicates that the average individual investor underperforms a market index by 1.5% per year, while active traders underperform by 6.5% annually.

8. LETTING EMOTIONS DICTATE YOUR DECISIONS
Panic and greed are the most common emotional triggers for poor investments. If the market dips, it’s easy to fall prey to fear-driven selling.

During the COVID-19 crash, the stock market plummeted by more than 30% in just a few weeks. People freaked out and sold everything. But by the end of 2020, the market had fully recovered and quickly hit record highs. Investors who held on or bought more made big gains. Those who sold in panic locked-in their losses and missed out on one of the biggest rebounds in market history.

The secret to smart investing is having a plan and sticking to it. Never make decisions based on emotion. Having said that, if you want to try and capitalise on big market shifts when they happen, it’s wise to follow Warren Buffet’s golden rule: “Be fearful when others are greedy, and greedy when others are fearful.”

9. NOT REBALANCING YOUR PORTFOLIO OFTEN ENOUGH
Even if you start with the perfect asset allocation, your portfolio won’t stay balanced forever. Investments drift over time.

If stocks have a great year, they could end up making up a much bigger percentage of your portfolio than you planned. It means you’re suddenly taking on more stock market risk than you intended.

You could end up being overexposed to a single asset. Maybe your tech stocks double, and now half your portfolio is in tech. If tech suddenly drops, you suffer more than is necessary.

For example, let’s say your original plan was 70% stocks and 30% bonds. After a strong bull market, your stocks now make up 85% of your portfolio. If stocks drop by 40%, your portfolio takes a much bigger hit than if you kept the original 70/30 balance.

Your financial goals change too. The risk level that worked for you at 30 may not work at 50. You need to adjust accordingly.

To keep your portfolio in check, review and rebalance it yearly. If one investment has grown too large, sell some and move the money into other assets. You might also want to adjust risk as you get older. When retirement is decades away, you can afford more risk, but as you get closer, you’ll want to shift toward safer investments like bonds or dividend-paying stocks.

10. WAITING TOO LONG TO START INVESTING
The “perfect time” to start investing is today, regardless of market conditions. The market is always uncertain, but waiting for the ideal time will limit your returns.

Even if you can only afford a small amount, say £100 per month, it’s better than nothing. Start off with low-cost index funds and ETFs, as you can set up automatic contributions and stay consistent for a good chance of positive results.

Let’s look at an example of why you shouldn’t wait too long to start investing. Below is a comparison of three investors all planning to retire at 65.

Emma contributes the same amount as Alex and Mike, but ends up with more than 5x as much as Mike because she started earlier. If Mike wanted to catch up to Emma, he’d have to invest over £1,000 per month instead of £200.

11. WORKING WITH THE WRONG ADVISER
Imagine hiring a personal trainer who just tries to sell you protein shakes instead of actually helping you get in shape. Hiring the wrong adviser is similar. Some will push high-fee investments because they earn a commission when you buy them.

Fees can quietly drain your returns, high advisory fees can cost you tens or even hundreds of thousands over decades. Look for financial advisors that are up-front and transparent about fees without earning commissions for selling you certain products.

SMART INVESTING IS ABOUT STRATEGY, NOT LUCK
Even the best investors make mistakes, but what sets them apart from the rest is that they learn from them. The truth is, investing isn’t about picking the next hot stock, timing the market perfectly, or following hype. It’s about discipline, patience, and strategy.

The most common investment mistakes are due to emotionally-driven decisions, lack of planning, and hidden costs. Avoiding these pitfalls by sticking to clear goals, keeping your portfolio diversified and balanced, aiming for low fees, and thinking about long-term results — you set yourself up for consistent growth and financial security.

Contact us today if you’d like to find out how we can help you grow your investment portfolio.