Seven investing turkeys to avoid this Christmas

The season of goodwill and good parties is upon us, but don’t let well-oiled enthusiasm dent your judgement when it comes to managing your investments.

There’s no shortage of simple but potentially costly blunders that investors need to be aware of. Some won’t physically make a hole in the value of your holdings, but could mean you miss investment opportunities. Others do leave you vulnerable to real financial loss.

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So, here is a checklist of timeless turkeys you really don’t want to sample this festive season.

Opportunity losses

1) Don’t be too cautious

This year’s stock market ups and downs may have left you feeling pretty nervous about committing money to the markets. But if you’re investing for the coming decades (as opposed to a specific goal in the next few years), history shows that shares beat both cash and fixed interest investments in the long term.

The 2022 Barclays Equity Gilt Study finds that over 50 years, equities have beaten cash and fixed interest over all time periods; over 50 years, the three asset classes have produced real annualised returns of 4.9%, 3.0% and 0.9% respectively. There are, of course, periods of upset, but over longer periods volatility is absorbed and growth continues.

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Importantly, those small differences in annual returns translate over time into very large differences in value. Take £10,000 invested in the stock market and earning 4.9% a year. After 30 years it would be worth £42,000; if it had been ploughed into bonds earning 3% a year over that time, it would be worth just over £24,000; and in a cash account at 0.9% it would be worth around £13,000 after 30 years.

2) Don’t panic and sell 

On the whole, attempting to sell when markets are falling and buy back into them once they start to recover is a mug’s game - even the professionals say so. The challenge is that markets tend to bounce rather than recovering gradually – and if you’re not invested on the biggest bounce days, your money is likely to take much longer to recover.

A 2021 study from Bank of America demonstrated just how painful that can be. It found that investors in the US who missed the S&P 500’s best 10 days each decade from 1930 to 2020 saw their total returns fall from 17,715% to a measly 28%. It concluded that the safest approach is simply to hang in there and remain invested.

3) Don’t withdraw income if you don’t need it

One of the great miracles of investing is compounding, whereby earnings that are reinvested themselves generate more earnings, and those in turn do the same, resulting in exponential growth. So if you don’t need to supplement your household cash flow, opt to have dividends or interest reinvested.

You can use a dividend reinvestment calculator to illustrate the power of compounding. Let’s take a holding of 100 shares worth £10 each - a total of £1,000 – and paying 5% dividends on a half-yearly basis. Assuming no capital growth, if you withdraw all the dividends your investment will be worth £1,000 no matter how long you leave it.

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What about with dividends reinvested, but no other capital growth? After 10 years your holding has risen to £1,639 and the annualised growth rate is 6.4%, as those reinvested distributions themselves produce dividends. After 20 years, it’s grown to £2,685 and the annualised growth rate has risen to 8.4%, and after 30 years it’s worth almost £4,400 and the annualised growth rate has climbed to 11.3%.

4) Don’t forget about a pension

The most lovely thing about pensions is that the taxman very generously tops up your pension pot with all the tax you would have paid on your contributions. If you’re a 40% taxpayer, even if you only pay that much tax on a tiny sliver of your total earnings, everything you pay into your pension out of taxed income will be topped up at 40%.

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Even people who don’t pay any tax at all can put up to £2,880 into a pension and the big-hearted taxman will add another 20% to bring it up to £3,600. So if you possibly can spare the money – and it’s not easy for a lot of people these days – using as much as you can of your £40,000 annual pension allowance makes a lot of sense.

Then, of course, you are obliged to leave the money invested in the pension to grow, free of tax, until you’re at least 55 - but as we’ve seen above, that can work out pretty well over the long term.

REAL LOSSES

5) Don’t overlook your ISA tax allowance

Every UK resident aged 18-plus is entitled to put up to £20,000 of spare cash into an ISA each tax year (which runs from 6 April to 5 April the following year). Whether they opt for a savings account in a cash ISA (in which case the minimum age is 16) or invest via a stocks and shares ISA, the tax wrapper means their money can grow free of income or capital gains tax (CGT) and there is no tax to pay when it’s withdrawn.

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Given that the government has announced plans to cut the amount of investment profit you can take without paying CGT from the current £12,300 to £6,000 a year in April, and cut it again to just £3,000 in April 2024, that tax protection is an increasingly valuable one. And it becomes more so, the longer you hold your investments and the more they increase in value. It really is a no-brainer not to use your allowance, no matter how small your contributions.

6) Don’t stick with a single fund

I should qualify this: there are so-called multi manager funds that deliberately spread investors’ money across a range of specially selected external managers or funds - effectively creating a single fund one-stop shop. Some of the great global investment trusts such as Alliance Trust (LSE:ATST) and Witan (LSE:WTAN) operate in this way, and work very well as a starting point for new investors who want to keep things simple, or as a core holding for more established investors.

But in general, investing into a single fund - say a UK all companies fund or trust –  isn’t a great idea, because when that market hits the skids, or that manager makes a blunder, the whole of your investment is negatively affected. I learned that lesson the hard way, having enthusiastically put most of my money into a single tech fund in 2000, shortly before the tech bubble popped.

In contrast, holding a handful of funds that focus on different regions, investment styles or sizes of company provides valuable diversity and makes it much less likely that your whole portfolio will be damaged by a setback.

Of course, a broad market downturn is likely to have wide-ranging impact, although even then some parts of the market may be less badly hit than others: value-focused funds did a lot better than growth when markets crashed earlier this year, for example.

7) Don’t pay more fees than you have to

Some brokers charge percentage-based fees (which they may cap), so as your ISA or pension grows, the amount you pay also rises. With others, including interactive investor, you pay a flat fee. That may seem a relatively expensive option when you’re right at the start of your investing journey, but as your portfolio grows the cost remains the same.

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Consumer organisation Which says that for portfolios above around £50,000, flat fees are the more competitive option. ii has done its own analysis and finds that for a trading account plus an ISA over 30 years, the cost advantage between ii’s flat fee arrangement and the percentage-based charges of leading competitors amounts to as much as £45,000.