Common investment mistake could cost $1 million

Aussies hoping to get rich by investing need to avoid a common mistake that could cost over $1 million in returns.

Most people don’t realise that the key to making a lot of money investing is less about what you do, and more about what you avoid.

Reality is that you don’t need to do anything crazy to get some pretty insane results when you invest. The table below shows how much you need to save and invest to reach different levels of wealth over time.

Note that this table assumes that you only receive the long term average sharemarket return of 9.8 per cent. As you can see from the figures, investing small amounts consistently over a long time will create a significant amount of wealth.

But it’s easy to get sucked into one common investing trap – and it’s this one thing that holds so many people back from achieving the results they could or should.

It doesn’t take much research to be bombarded by the thousands of ways you can make big money investing in a fairly short amount of time. This approach will often be promoted by a person or company with an agenda to push.

The promise of this investing approach is higher returns in less time. And don’t get me wrong, getting more returns in less time is definitely a good thing. In the table below I’ve updated the figures to show how investments would grow if you received a return of 15 per cent vs. the sharemarket average of 9.8 per cent.

You can see in the table above that you need to invest a lot less to end up in the same position, so this outcome is an attractive one. But in reality, taking this path comes with a much higher level of risk that most people either don’t think about, understand, or just ignore.

This risk can result in investments failing, and this is the single biggest trap that leads to investors suffering through poor results.

If you want to get ahead with your money, momentum is crucial. You need to get started with saving and investing, and get your momentum building. Once your momentum is created, you simply need to keep it going, and let time and money do its thing.

The only thing that can get in your way is if something happens that kills your investing momentum. And really the only thing that can lead to this is choosing bad investments that fail or underperform.

If you suffer an investment failure you lose money. But much more costly than that, you lose time. A setback is created that sees you going back steps, having to make up lost ground and get things back to where you already were.

Small vs. big company risk

One myth that catches out many first time investors is the fact that not all investing risk is made equal.

If you think about the performance of a small company, it can be difficult to predict. Firstly, many small companies fail. Then for those that succeed, in some years the company may do incredibly well and see strong growth, then in other years it can be the complete opposite. But the bigger a company is, the more predictable the growth becomes.

Investing in small companies can be tempting but it’s also risky. Picture: iStock

This predictability comes from the fact that the bigger a company gets, the more experience it has in its field of operations. The company builds a track record, customer base, and operational capabilities, all things that create more stability in the financial performance of the company. The implication is that the returns on a larger company are going to be more stable and see fewer and smaller ups and downs (less volatile) than the performance of a smaller company.

When you look at the largest companies in any given country or around the world, the level of stability is taken up another notch. The biggest companies are leaders in their field, have significant brand loyalty and value, and have a track record that’s been validated and proven over a number of years, often decades, and sometimes centuries.

The implication for investors is that if you were to invest into one or a number of small companies, your returns are likely to vary significantly from year to year. If instead, you invest into the shares in the largest companies, your investment returns will always be more stable, consistent and predictable.

Also worth noting here that the bigger a company is, the less likely it is to fail. Sure there have been some high profile big companies that have collapsed over the last few decades, but these are few and far between.

Bigger, more stable companies are historically more reliable to invest in.

I don’t want to misrepresent the risk here, by investing in big companies you will still see periods where the returns can be either strongly positive or negative. But these ups and downs will be less than investing into smaller companies.

Biggest and most stable companies

Most investors who are new to the game make the mistake of thinking that all shares have the same risk attached to them. They think that it’s either a win big or lose big type bet.

Then, because it’s natural to really want the higher returns that you could potentially get by choosing more speculative investments, people make bad investment choices and suffer with poor results.

This big win or loss investing may be the case if you’re speculating and investing into smaller companies, but when you choose to invest into the biggest and best companies, it’s no longer ‘speculating’, but instead you’re now investing.

The next obvious question is how best do you find and invest into the biggest and most stable companies in the world. The good news is that’s exactly what you get when you invest through index funds. And while there is no guaranteed ‘right way’ to invest, the statistics show that index funds perform better more than 80 per cent of the time.

The wrap

Reality is that investing success is easy, there are only three things you need to do. First, you need to get started. Then you just need to keep going. The final piece is the one so many struggle with, and it’s where you need to avoid investment setbacks and mistakes.

The most common way these mistakes and setbacks are created is when you choose bad investments. Often this happens when you choose investments hoping for a big return, not recognising the huge risks that come with this approach. Instead, stick with quality investments that are tried and tested, more stable, with less risk. This way, you can sleep well at night knowing your money is growing to create the future you want.

Ben Nash is a personal finance and investing expert commentator, financial adviser and founder of Pivot Wealth. Instagram | Facebook | Podcast.

Ben is author of Replace your salary by Investing and Get Unstuck, and runs regular free online money education events, you can check out all the details and book your place here

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.