Five investing turkeys to avoid this Christmas

Key takeaways

• When it comes to investing, there are some common mistakes everyone makes
• Trying to time the market, not diversifying and panic selling are all recipes for disaster
• Rounding out the list are tax and fees, which can eat into returns if you’re not diligent

‍

With Christmas just weeks away, it's almost time to dig out the reindeer jumper, pour a glass of bubbly, and start boiling those sprouts!

But whatever you're planning for your festive feast, there are plenty of investing turkeys you won't want to sample this Christmas.

Dodging these five classic investing blunders will help you maximise your wealth in 2025 and beyond.

‍

1) Don’t time the market

We all know that the price you pay for stocks is crucial if you want a good return. But knowing when the price is right is far from simple. Like timing Christmas dinner to perfection, picking the best moment to invest is much harder than it seems.

Holding out for the right moment to invest could mean missing out on golden opportunities. 

In fact, trying to time the market could actually make you a worse investor, according to research from JP Morgan. Their calculations reveal that mistiming your investments by just a few days could put a serious dent in long-term returns.

JP Morgan’s research compares returns if someone stayed invested with returns if they were to dip in and out of the market. Their calculations show that:

• If you invested $10,000 in the S&P 500 in 2004, your wealth would have snowballed to a cool $69,637 by the end of 2023. 
• If you missed the best 10 days you would have ended up with $29,154.
• If you missed out on the best 30 days would have just $11,483, barely increasing your original stash.

While this past performance is not predictive of future returns, analysis shows that the stock market is difficult to predict. Returns aren’t consistent and are often concentrated in just a few days, with the stock market sometimes leaping up significantly. This means missing out on those “best” days could prove a serious and costly investing mistake.

And without a crystal ball, the reality is that it’s impossible to predict when those best investing days will happen. 

In truth, boring is often best when it comes to investing. Instead of trying to time the market, a more disciplined approach to investing is the name of the game. 

Blocking out the noise and continuing to invest regularly is one of the best ways to build long-term wealth. It’s better to get rich slowly than get burnt trying to rush.

‍

2) Don’t put all your eggs in one basket

While it seems like a confident move, focusing on just a few favourite stocks is rarely a good idea. It’s a common blunder that often catches out beginner investors. 

Like picking a big surprise present for your fussy teenager, it’s a high-risk strategy. It could expose you to an unwelcome loss if one of these stocks underperforms. For example, investors in tech giant Cisco during the 1990s “dot-com bubble” are still waiting for the share price to recover to its late 1990s levels.

Instead, because the stock market is unpredictable, it makes sense to build a portfolio that spreads your risk across different stocks, sectors, and geographies. While one sector may be thriving now, out-of-favor sectors often have the potential to outperform in the future.

Although there are no set rules, there are plenty of simple ways to build a diversified investment portfolio. For example you could:

• Avoid having more than 5-10% of your portfolio in one stock
• Spread your investments across different geographies and sectors
• Consider investing in ETFs, which will automatically spread your investments across multiple companies 

‍

4) Don’t panic if there’s a downturn

Seasoned investors know that stock market crashes are more common than you might think. Since the late 1940s US investors have lived through 14 “bear markets” where stock prices have dropped at least 20%, according to analysis by First Trust Portfolios.

And while the stock market is currently riding high, it makes sense to be prepared.

Although it’s tempting to panic and sell up during a downturn, it could prove a costly mistake. Stock prices often rebound fast so reduced values may not affect investors who hold tight.

Surprisingly, JP Morgan’s research reveals that some of the best days for stock prices often follow hard on the heels of the worst days. Their data shows that seven of the 10 best days for stock prices were within two weeks of the 10 worst days. This means that investors who panic sold during market slumps often missed out on the subsequent recoveries, leaving them significantly worse off.

What’s more, if you sell during a downturn a “paper loss” could become a real loss. In investing jargon, it’s known as “crystallising a loss”.

The lesson here is that if you hold your nerve, chances are that stock prices will recover, especially if your portfolio is well diversified.

‍

4) Don't forget tax

Ironically, the most successful investors are the worst affected by investing taxes. And with the tax burden on the rise, ignoring them could prove an expensive blunder.

Capital gains tax hikes mean investors face higher costs when selling shares. With rates now at 18% for basic rate taxpayers and 24% for higher rate taxpayers, a £50,000 gain could result in up to £11,280 in tax.

And it’s not just capital gains tax investors need to consider. Tax on dividend income is also increasing. If you’re a higher earner who collects £10,000 in dividend income this tax year, you’ll need to hand over £3,206 to the taxman. Over a ten year period, that adds up to a whopping £32,062 in tax. 

Fortunately, there are simple ways to protect your long-term wealth from tax. By using your ISA or pension, you can shield investments from both capital gains and UK dividend tax. You can invest up to £20,000 per year in an ISA and up to £60,000 annually in your pension.

‍

5) Don't ignore the small stuff

With the stock market riding high it’s easy to focus on returns and forget the small stuff. However, those seemingly minor fees can take a big bite from the investing pie over time.

This is where your novelty magnifying glass from the Christmas cracker could be useful, as what we're paying is often buried in the small print. Most providers charge a percentage fee to manage your investments as well as an individual charge on each fund. Providers will often sell some of your investments to pay the fees, which really add up over time.

For example, if you have an investment pot worth £100,000 and pay your provider 0.45% in platform fees, you’ll end up paying them an eye-popping £450 every year just to keep your portfolio on that platform. That means selling more and more of your investments each year as your wealth grows.

Instead, transferring to a provider with a simple flat fee and no commissions on transactions could boost your investment stash over time. You’ll know what you’re paying and can keep more of your hard-earned cash.

If you have some downtime this Christmas, then take a few moments to put on the kettle, crack open the filing cabinet and check out the small print. You might be surprised how much you can save.

There’s just a few weeks left to take advantage of an additional bonus if you’re considering transferring your pension or ISA to Freetrade. Start your transfer by 31 December 2024 and you could earn up to £2,000 for transferring a pension and another £2,000 for transferring an ISA to Freetrade. 

Transfer at least £10,000 to qualify. Cashback capped at £2,000. Annual subscription required. Terms apply. Offer ends 31 December 2024.

‍

‍

Important information

‍