Suddenly, you receive an inheritance or withdraw your pension funds. Perhaps you find that you regularly have more money left over at the end of the month than you spend, and your savings have accumulated. Then the question arises: to invest or not to invest? And if so, what should you pay attention to? Here is a compilation of the 10 most important mistakes you should avoid.
We 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, it has been virtually impossible to make money with fixed-income securities (bonds). This means that returns cannot be achieved without taking on risk. Even if an acquaintance boasts about the 20% return they claim to have achieved, it must be clear that this was only possible by accepting significant risks, and the braggart likely lost 20% or more in another year. If someone promises you returns of 10% or more, you can assume that the offer is dubious.
2. Overestimating or underestimating one’s own abilities
A surprisingly large 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 aren’t interested in financial markets and, due to a lack of know-how, forgo investing their money altogether. These people have to watch as their savings are slowly eaten away by inflation. You don’t have to be a financial expert to invest. For beginners, there are mixed investment funds, so-called portfolio funds, that replicate investment strategies. Those who want to invest more money should seek out a high-performing asset manager.
3. Overestimating or underestimating one’s own risk capacity and willingness to take risks
Your risk tolerance depends primarily on how long you are highly likely to not need the invested capital. The longer the investment horizon, the more risk you can take. Risk appetite, on the other hand, indicates how much risk you are comfortable with. The best measure of this is the loss you can sleep soundly with. If a 10% loss throws you off balance, your risk appetite is low. However, if you can still sleep soundly with a 30% loss and are confident that the loss can be recovered by the end of the investment horizon, you likely have a high risk appetite. Those who underestimate their risk tolerance and risk appetite miss out on potential returns. Those who overestimate them become anxious in volatile markets and risk selling their investments at the worst possible moment.
4. Greed and Panic
We humans have a tendency to succumb to greed and panic. If we hear that someone has increased their wealth tenfold with Bitcoin, we want that too and may take senseless risks to achieve it. When markets are in freefall and we read about recession and crisis everywhere, we tend to panic and sell. Anyone who invests money needs a steady hand and a certain degree of self-control; that is, one must not allow oneself to be led into rash actions by either greed or panic.
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5. Incorrect assessment of the entry point
Stock markets reflect the future earning potential of companies. Since we don’t know the future, we rely on our assessments, which can later prove to be right or wrong. A common mistake is not investing: especially in recent years, many savers and investors have refrained from investing (more) funds because they believed the markets were overvalued, thus missing out on significant returns. Conversely, in periods of uncertainty with low entry prices, the fear of further price declines is also so high that the optimal entry point is usually missed. With a sufficiently long investment horizon, one can actually enter the market at any time. When markets are highly valued, it’s possible to invest in tranches, thereby reducing the risk of entering at the wrong time.
6. Too little attention
If someone has little desire or time to actively manage their investments themselves, an asset management mandate is the right choice. However, even this requires a minimum level of attention. If this attention isn’t given, one must expect that their asset manager will achieve below-average returns for years without noticing. And if one does discover it, one has to overcome their reluctance and initiate the switch. Most investors shy away from the (perceived as excessive) effort involved.
7. Blind trust
It’s essential to be able to trust your financial advisor. However, it’s equally important to remain critical and form your own opinion on the advisor’s suggestions. Failing to do so puts you at risk of being taken advantage of, for example, with complicated products that have high hidden costs. Never invest in something you don’t understand, because the more complex a product, the higher the likelihood that it includes high margins for the provider.
8. Lack of cost awareness
In most areas of life, we’re used to fixed prices. It would never occur to us to haggle over the price of a tube of toothpaste at Migros. Investments are a different story. Many providers use «indicator prices» that hardly anyone pays. So, if you don’t research typical prices, you might end up being one of the few customers paying the inflated official prices. The more money you invest, the greater your room for negotiation. Going into negotiations uninformed is certainly not a good idea. We would like to refer you to our article with information on pricing in private banking .
9. Give in to impulses
When investing, it’s crucial to constantly question your impulses. If someone tells you that Nestlé’s stock will continue to perform well because humanity will always need food and drink, it’s understandable to believe this and buy the stock. However, before investing, you should also consider the stock’s price-to-earnings ratio to ensure you’re not overpaying for these generally positive future prospects. Similarly, if you believe real estate is a stable investment, be aware that, depending on the market phase, buying a real estate fund can cost up to 50% more than the actual value of the properties the fund holds (known as a premium). If you’re strongly convinced by just a few companies, you risk taking on unnecessary concentration risks due to insufficient diversification. Financial market research has clearly demonstrated that focusing on a small number of stocks leads to a suboptimal risk-return ratio.
10. Careless selection of the asset manager
Perhaps the most important decision is choosing the bank or independent asset manager for your investments. However, a truly fact-based selection process is rare. Instead, most people turn to a provider they know or invest their money with the bank where they already have their mortgage. Investors should be clear about their needs and then choose accordingly. Thanks to the independent and free support offered by FinGuide, this is thankfully no longer a problem.
You can find out more about investing money in Switzerland at the following link .
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