Sharemarkets are set to continue their wild run and there’s no guarantee that popular rules of thumb will help savers get the highest possible return in the years ahead.
The only certainty is that investing is a long-term game, spanning decades for many Australians.
You can invest in the right companies at the right time, but your portfolio will often benefit just as much from avoiding some key pitfalls that many fall into - here are some common errors to avoid:
Only owning bluechips
“Blue chips” are our largest companies, each with well known goods and services. Unfortunately, their size doesn’t necessarily mean they are the best investments.
Company size and market dominance offers little shareprice protection and some of Australia’s largest companies can attest to this, having endured a fall from grace.
Woolworths has lost twice as much as the wider market in the past year. Not a good result for a company often perceived to be a sure bet based on its blue chip status.
Fellow major supermarket giant, Coles, hasn’t fared as poorly.
Other shockers among our most dominant companies include Woodside Petroleum and Origin Energy, who have succumbed to the pressures of a tanking energy prices.
Even the Big Four Banks have all fallen more than the wider market.
While every shareprice has the chance to recover, owning companies based on the perception that size equals success is risky business.
There are companies that have fared exceptionally well over the past year and also come with impressive five year track records. Some of the brand names you are probably familiar with include Carsales, Dulux and Treasury Wines just to name a few. There are winners to be found, but keep in mind that a brand name and size doesn’t necessarily indicate success.
Believing shareprices always rebound
Shareprices go up and down, but there’s no guarantee they will return to where they started.
There are a number of reasons why shareprices won’t rebound quickly. Often poor financial results or issues facing an entire sector - such as falling commodity prices - can be the cause.
Major miners - BHP Billiton and Rio Tinto - are at the mercy of iron ore prices and are trading at around a third of their peak shareprices. The slump has been caused by a similar fall in the price of the red dust.
It’s a rough road back to the peak, and one that is reliant on much higher iron ore prices.
Patience is a good trait to have when investing, but waiting for a miraculous recovery could mean giving up better returns found by directing money to another sector with brighter prospects.
Often why prices have fallen will determine whether or not prices will rebound and how quickly.
The secret is knowing when to cut your losses and move on because past returns don’t always continue into the future.
Gold is good?
Savers often hold gold due to the belief it’s a good hedge when sharemarkets tumble.
While gold has been the leading performer of popular financial assets so far this year, it’s on the back of a handful of dismal years.
It’s often forgotten when holding any physical commodity you are banking on a price rise to collect any form of return in the absence of dividend payments.
Investors can hang on to the shiny metal for years and miss out on more attractive returns from other asset classes over this time. The opportunity cost can be huge.
Pursuing the belief gold makes a good hedge is a tradeoff between the gain in a doomsday scenario and the potential returns missed by investing in an asset class with greater returns as you wait. These things should be weighed up before diving in.
Setting your portfolio up for investment success is not just about picking winners - make sure you avoid falling victim to some of the traps that appear along the way.