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Five simple investment mistakes to avoid in 2025
18th December 2024


If you’re still relatively new to investing, taking your first steps can be both exciting and daunting in equal measures.
With so much information available to you, it’s easy to make decisions that, whilst well-intentioned, might inadvertently hinder your progress towards your long-term financial goals.
In fact, even seasoned investors make such mistakes and fall into detrimental habits – so if you’ve been investing for years, you might wish to revisit your philosophy and avoid common pitfalls.
To help you navigate this, continue reading to discover five common investment mistakes, and some ways you can avoid them and build a more secure financial future.
- Letting fear drive your decisions
While fear has played an important evolutionary role in helping humans avoid danger, it can also lead to poor investment decisions.
If, for example, markets experience a period of volatility, you may feel the urge to sell your investments prematurely, alter your strategy, or withdraw from the market entirely.
This emotional reaction often stems from “loss aversion” – the concept that the pain of losing money feels far more intense than the pleasure of gaining it. It is a philosophy first introduced by Nobel Prize winner, Daniel Kahneman, who sadly passed away in March 2024.
Imagine flipping a coin. If it lands on heads, you gain £20. If it lands on tails, however, you lose £20. According to Kahneman, most people won’t take this bet unless the potential gain far outweighs the potential loss – for example, if you’d lose £20 on tails, but gain £100 on heads.
This loss aversion mindset can lead you to invest very cautiously, potentially keeping your portfolio too low-risk, and falling short of the returns needed to reach your goals.
Instead, when faced with market downturn or challenging situations, it’s worth taking a step back before making alterations to your portfolio. By pausing to assess the situation rather than acting from a place of loss aversion, you can make informed decisions that support your long-term objectives.
- Taking a short-term view
It’s natural to feel anxious over the unpredictability of markets. You might even consider timing the market or prioritising short-term gains over a long-term strategy in this instance.
Though, research shows that this approach can be counterintuitive, as historically, the longer you hold your investments, the higher your chances of achieving positive returns.
For instance, Nutmeg reports that if you picked a randomly chosen global stock on any day between January 1971 and July 2022, and then held onto that investment for 24 hours, you would have had a 52.4% chance of positive returns – similar odds to tossing a coin.
If you extended this holding period for a year, your probability of returns would have risen to 72.8%. Hold onto it for 10 years, and this would have increased even further to 94.2%.
Not only could a long-term perspective increase your likelihood of gains, but it can also give your portfolio time to recover from market downturns.
- “Skimming” off the top of your portfolio
You might be tempted to withdraw some cash from your portfolio to cover unexpected expenses or to keep some in reserve for emergencies.
Whilst this might seem practical, it can affect your long-term gains.
Morningstar analysed the performance of two hypothetical portfolios – one reinvesting all income and the other holding cash during perceived periods of overvaluation. Over 21 years, the portfolio that stayed fully invested outperformed the cash-holding one by 0.76% each year.
Known as “cash drag”, this shows how even small interruptions to your investment strategy can hinder growth.
To avoid this, it’s worth building an emergency fund in cash. Having three to six months’ worth of household expenses set aside (or up to 12 months if you’re self-employed or have dependents) can provide an invaluable safety net.
This could allow you to leave your portfolio untouched in the face of the unexpected, potentially ensuring its continued growth.
- Putting all of your eggs in one basket
When news outlets or your friends and family are constantly talking about the next “hot stock”, it can be tempting to deviate from your plan and invest in it.
However, history shows that chasing trends might only result in disappointment. Data from Schroders reveals that, in 12 of the past 18 years, no top-performing US company remained in the top 10 the following year.
Even in the UK, for 11 of those 18 years, the average top-10 performer fell to the bottom half of performance distribution in the next year.
Instead of investing in the next “rising star” it might be prudent to take a more measured approach by diversifying.
By spreading your investments across various sectors, asset classes, and geographical areas, you could offset losses in one area with gains from another.
For example, consider this quilt that shows the performance of several asset classes from 2013 to November 2024.
Source: JP Morgan
The varying performances of these different asset classes show how investing solely in one could cause you to miss out on potential growth elsewhere.
While diversification doesn’t completely eliminate risk, it can reduce the chance that a single event will have a considerable effect on the overall performance of your portfolio.
- Taking a DIY approach
Whilst managing your investments can seem cost-effective at times, it can also leave you vulnerable to some of the many common pitfalls – including those mentioned above.
Without professional guidance, it’s easy to make snap decisions based on fear, take a short-term view, or overlook the importance of diversification.
Working with a Financial Planner could help you avoid some of these mistakes. In fact, research from Unbiased shows that professional financial advice could make you nearly £48,000 better off in pensions and financial assets.
A Planner could help you remain disciplined as you invest whilst maintaining a long-term perspective.
Better yet, we can also provide holistic advice, ensuring you have an emergency fund in place and an investment strategy that aligns with your overall financial plan.
Get in touch
If you’re still new on your investment journey and would like our expert support, make sure to get in touch today. And, if you’re already a client here at PenLife, speak to us about ensuring your portfolio is on track to meet your goals.
Email us at enquiries@pen-life.co.uk, or call 01904 661140 to find out how we could help.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only. All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Category: Investment