The worst mistakes in investing – and how to avoid them

Mistake 1: Not investing

Those who simply leave their money in their bank account in the current zero interest rate environment are missing out on a potential return that is underestimated in the long term. Those who do not invest suffer an inflation-related decline in their purchasing power. Month after month.

Of course, investing money can be emotionally stressful and you have to put up with fluctuations in value. But that is exactly why you will be rewarded in the long term.

Doing nothing can have a significant negative impact on your financial situation. If you invest 1’000francs  in stocks every month, after 25 years you will have almost 600’000 francs at a return of 5 percent. That is 300’000 francs more than you paid in.

Almost double in 25 years: thanks to the compound interest effect, a regular investment of 1’000 francs results in additional income of almost 300’000 francs. This calculation example is based on a pure stock portfolio with an annual return of 5 percent. (Source: Compound interest calculator truewealth.ch)

Investment mistake 2: Not having a strategy

Stock markets are subject to strong fluctuations. An investment strategy tailored to your own needs can help counteract this.

An investment strategy should generally be as risky as possible, i.e., have the highest possible equity allocation – but only to the extent that you can still stick to your strategy in the event of a sharp market downturn (mentally, but also based on your personal financial situation).

If you get cold feet after a sharp market correction and sell your investments, you will realize the loss. You then run the risk of missing out on the subsequent market recovery.

Investment mistake 3: Putting all your eggs in one basket

Investing all your capital in one or just a few stocks carries a considerable risk of loss. No company in the world is immune to failure, not even the big ones. Just think of Credit Suisse.

It is crucial to diversify your portfolio to reduce investment risk. This is free, or as Nobel Prize winner Harry Markowitz once said: «Diversification is the only free lunch.»

In practice, this means investing in an entire stock market instead of individual stocks. Instead of just stocks, invest in different asset classes such as bonds, real estate, and commodities. Think global instead of just local.

«Don't look for the needle in the haystack. Just buy the whole haystack,» to add another famous quote. It comes from the inventor of index funds, Jack Bogle.

Mistake 4: High investment costs

The compound interest effect is every investor's reliable companion. It ensures that asset growth continues to accelerate by continuously reinvesting current profits.

High costs act like sand in the gears. If you earn a return of four percent instead of five percent due to high fees, it will take you 18 years instead of 15 to double your initial capital. And many investment costs are still hidden today: for example, external product costs or currency conversion fees. Banks often offer nested funds. You buy a fund of funds, which in turn contains expensive funds.

When choosing an investment solution, it is worth comparing fees and paying attention to independence and transparency.

Investment mistake 5: Home bias

We often prefer the familiar to the unknown. When it comes to financial investments, this leads to a tendency to disproportionately weight investments in the domestic market. For us, this is Switzerland, but it applies all over the world. A slight overweight of the home market or one's own currency area does not have to be a bad thing, even on a global scale. A strategy for a Swiss investor should consider that future expenses will mostly be incurred in Swiss francs.

Nevertheless, only those who invest globally can fully participate in the opportunities offered by the world market. And share in the big growth stories.

Investment mistake 6: Active management

The temptation to buy the next stock at a low price and sell it at a high price shortly thereafter is notoriously strong. However, the development of the financial markets, especially in the short and medium term, is unpredictable.

Active management statistically leads to lower returns – especially when additional costs are taken into account. And these costs add up. A study by Standard & Poor's has shown that after ten years, 85 percent of active funds are outperformed by the broad stock market.
It is better to avoid market timing altogether and take advantage of a passive, broad-market investment strategy regardless of the market situation. ETFs (exchange-traded funds) are the perfect investment instrument for this.

Making regular deposits eliminates the stressful question of when the right time to invest is.

Investment mistake 7: No rebalancing

What does rebalancing mean? Rebalancing involves returning the weightings of the asset classes to the target strategy according to defined rules if they deviate too much from it.

Without restoring the balance, the investment mix would change over time. The proportion of equities could swell over the years at the expense of bonds and commodities. This makes the portfolio more volatile and no longer in line with your personal risk tolerance.

Rebalancing therefore ensures that diversification is maintained in the long term and that you do not gradually drift into a different, possibly too high portfolio risk.

Investment mistake 8: too frequent transactions

«Back and forth empties your pockets.» This stock market adage still holds true today. Every purchase and sale on the stock market incurs costs and thus reduces returns.

It is better to define long-term goals and pursue your investment strategy in a disciplined manner, reviewing it regularly. If your personal financial situation or investment horizon changes, adjustments are necessary. Short-term trends or emotions are not reasons to deviate from your strategy.

Investment mistake 9: Following the herd

People tend to orient themselves towards the behavior of others. This is an instinct, because following the crowd often protected individuals from danger or social exclusion in ancient times.

On the stock market, herd mentality leads investors to invest in certain stocks simply because they are currently popular.

A classic example is the dot-com bubble at the end of the 1990s. At that time, many investors invested heavily in technology stocks, which rapidly gained in value due to the internet hype at the time. When the bubble burst, everyone rubbed their eyes in disbelief.

To avoid herd mentality, you should maintain an independent way of thinking and take a long-term perspective.

This is where low-cost online asset managers come in. They ensure that you avoid all of the investment mistakes mentioned above from the outset and protect you from your own emotions and instincts.

They use a questionnaire to determine your investment goals and risk tolerance and then suggest a suitable, diversified portfolio that you can accept directly or personalize further. Rebalancing keeps the investment mix on track over time.

And all this conveniently via an app instead of a bank advisor. With market leader True Wealth, you can test the application extensively with virtual money. Once you have decided to invest, you can open a fee-free pillar 3a or an ETF portfolio for your child in addition to your free assets.

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