2018 has been a disappointing year for investors, with the FTSE 100 ending the year around 10% lower at 6,750.
We head into 2019 wondering whether President Donald Trump is making a terrible error by whipping up a US-China trade war, or if Federal Reserve chair Jerome Powell is making things worse by hiking interest rates four times in a year despite the global slowdown.
Anybody can make mistakes. You can’t influence Trump or Powell, but you can take a few steps to cut out your own errors, and avoid inflicting unnecessary damage on your portfolio. Here are three of the biggest to avoid the year ahead.
1. Panic selling
If you joined the rush to sell shares in the nightmare before Christmas, which saw the US S&P 500 suffer its worst week since 2011, you would be kicking yourself as US markets jumped 5% on Boxing Day, with the Dow posting its biggest ever single day gain. Imagine selling up and missing out on that.
Private investors have to resist the temptation to sell when share prices are falling, when everybody is panicking and analysts are predicting Armageddon. Instead, you should take advantage by buying shares at reduced prices. This is a message the Fool preaches time and again, but I make no apologies for that because it is a difficult thing to do in practice. It goes against most people’s herd instincts.
2019 is shaping up to be a volatile year but don’t panic as that means even more buying opportunities. Be warned, though, buying last year’s winners is another common error.
2. Timing the market
Finding the absolute perfect time to buy or sell a share is impossible. There are just too many variables, and nobody can do it with consistent success. The wisest investors, such as Warren Buffett, don’t even try.
You might think this is odd since I have just suggested you take advantage of share price dips to buy stock, but that is a different thing. That way you are buying something that has happened, not something you think is going to happen.
What you have to accept is that you will never buy at the absolute bottom or sell at the absolute top, and you will never get it just right even as you drive yourself mad trying.
3. Failing to have a plan
Investment opportunities present themselves all the time. For example, I believe the BP and Shell share price slump is handing us one now. You want to take advantage but you must also put any purchase in the context of your overall portfolio.
So if you already have a large chunk of your invested wealth in oil and energy stocks, you may not want to buy any more right now. Or maybe you already have hefty exposure to the FTSE 100 oil majors in various tracker or actively managed funds. Everything has to fit together.
Before buying any stock or fund, you need to know why you are investing, how long for, and your attitude to risk. Otherwise you are just making it all up as you go along. Don’t be in too much of a hurry.