10 Common Investment Mistakes (and How to Avoid Them): A Guide for Smarter Long-Term Investing
A few weeks ago, someone asked me: "What are the most common mistakes you see when meeting new clients?"
"Good question," I replied. "That would make a great blog post. Actually, three—one for investing, one for retirement planning, and one for tax."
This is Part 2—ten common investment pitfalls we frequently encounter. Part 1 covered pensions.
1. Chasing Dividends
Top of the list. It often starts with the phrase: "But it provides a good income…"
Yes, dividends can be a sign of a healthy, profitable business. But they're not free money. When a company pays a dividend, its share price typically drops by the same amount once it goes 'ex-div'—it's just a transfer from one pocket to another. It's like a company taking a slice out of its value and giving it back to shareholders. What's left is a reduced value.
As a strategy, chasing high dividend yields can lead to poor diversification and over-exposure to mature, low-growth firms that might be out of ideas, prioritising the distribution of surplus profits rather than reinvesting them.
2. Home Bias
It's common to see UK investors with portfolios heavily skewed towards UK stocks. Familiarity is comforting, but from a diversification perspective, it can be a poor move.
The UK now makes up just 3.5% of the global stock market. Overweighting your home market is effectively a big bet that the UK will outperform the other 96.5%. It might—but it hasn't for a while.
3. Doubling Down on Employer Shares
Many clients receive part of their remuneration in company shares (RSUs, LTIPs, etc.). It's tempting to keep hold, particularly whilst you're at the 'coal face' of the company's fortunes and may believe you have a good read on the company's prospects.
But it creates a double risk: your income and your investments are tied to the same employer. We generally advise against this unless there's a compelling reason not to diversify.
Ask yourself this question: your earnings already depend on the success of your employer—do you want a significant proportion of your personal wealth to depend on them as well?
What's more, we've written previously about how the vast majority of stock market returns are driven by a handful of companies. In the US, for example, a study from Arizona State University and NYU found that all of the wealth creation in the US stock market between 1926 and 2024 came from just 4% of stocks—the other 96% were statistically irrelevant.
So if you're holding a big single stock position in your employer, the chance of them being among that 4% is statistically highly improbable.
4. Holding Physical Share Certificates
We occasionally see clients with paper share certificates in the drawer. Whilst these often hold sentimental value, they can be a nightmare to administer, particularly when companies have been taken over or restructured, making the certificates outdated.
Not only do they pose administrative challenges (especially for your executors upon your death), but they're also a risk if lost or damaged. We'd recommend transferring these electronically (via a CREST transfer) to a modern platform where they're easier to manage, track, and consolidate.
5. Holding Too Much Cash
Cash feels safe—but it’s not risk-free. Inflation is the silent killer, gradually eroding the true purchasing power of cash holdings.
Older generations, especially, tend to be cash-heavy, often sitting on large cash ISA balances.
According to a recent article by aberdeen (formerly abrdn, formerly Aberdeen), of the £726 billion held in ISA accounts in the UK, just over 40% is held in cash ISAs, the rest in Stocks & Shares ISAs (click here for full article). Imagine if that moved to a still relatively high 30% - some £73 billion released into the capital markets.
While an emergency fund is essential, surplus cash might be better invested for long-term growth and to protect against inflation.
This is well illustrated in the chart below, comparing the long-term performance of a typical 60/40 equity/bond portfolio (per the Vanguard LifeStrategy 60% Equity fund) and 80/20 portfolio (Vanguard LifeStrategy 80% Equity), with the Bank of England Base rate - a proxy for cash.
Since the funds’ launch in 2011, the 80/20 fund has returned +217%, the 60/40 version 157%, whereas cash has delivered just 20%.
When investing, your capital is at risk. The value of your investment (and any income from it) can go down as well as up, and you may get back less than you invested, particularly where investing for a short timeframe (we usually recommend a horizon of at least 5 years). Neither simulated nor actual past performance is a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
6. Holding Too Little Cash
The flip side. Many younger investors have everything in the market and nothing on hand for emergencies.
We usually suggest 3–6 months of spending in easily accessible cash. This provides protection against a major outlay—new car, boiler, operation, etc. Also, if something should happen to your work, i.e., if you were to lose your job, having a stash of cash eases the pressure of finding a new job.
7. Default Pension Funds
Most workplace pensions default into 'balanced' funds. Fine in principle—but often too cautious for younger investors.
If you're in your 30s or 40s and can't access your pension for 20 years, it follows that you can afford to ride out market volatility. A higher equity allocation could provide significantly higher returns over the long run.
Historically speaking, each additional 10% equity exposure has delivered around 0.6–0.8% more per year. Over time, that can compound to a substantial increase.
8. Recency Bias
Investors often assume that what's done well recently will keep doing well.
For the last 15 years, the US has dominated global returns. But cast your mind back to 2000–2010—the so-called 'lost decade'—where US equities underperformed cash.
As the saying goes, 'diversification is the only free lunch in investing'—ensuring you don't have all your eggs in one basket, and being positioned to capture returns wherever they might occur.
9. Trying to Time the Market
A classic: "I'll invest when things feel calmer."
Translation: "I'll buy once prices are higher."
It's nearly impossible to time the bottom. Most of the market's gains come from just a few of the best days. Miss them and long-term returns are significantly dented.
A study by Dimensional Fund Advisors illustrates this perfectly. A hypothetical $1,000 investment in the Russell 3000 Index over 25 years (ending December 2022) would have grown to $6,356 (+536%). However, missing just the best week would have reduced this to $5,304 (+430%), whilst missing the three best months would have left you with only $4,480 (348%). Click here for the full article.
Investing consistently and ignoring the noise is often a better approach.
10. Complexity for Complexity’s Sake
It’s not uncommon to see portfolios containing 20, 30 or even 40 individual funds. These may be self-directed or constructed by various advisers over time.
Yet academic research consistently shows that beyond a certain point—typically around 40 underlying holdings—the benefits of diversification taper off. In essence, you're no longer investing to outperform the market; you're replicating it. And that’s not necessarily a bad outcome: over the last 46 years, the MSCI World Index (a global equity benchmark) has returned an average of 10.3% per annum [source: Curvo backtest].
The challenge is that complexity often comes with cost. Many portfolios are built from layers of actively managed funds, each incurring fees, plus additional charges for portfolio management and frequent trading. The result? Market-like returns, but with significantly higher costs—leaving the investor worse off in net terms.
We believe in a simpler, lower-cost approach. Our preferred investment strategies are designed to broadly track the market, while applying a measured tilt towards companies that are smaller, cheaper (i.e. 'value' stocks), and more profitable—three ‘factors’ that have been shown to outperform over the long run.
This approach blends the best of both passive and active investment styles: the diversification and cost-efficiency of the former, with the evidence-based potential for outperformance from the latter. Some may argue it’s too simple. We would argue it’s simply optimal.
Conclusion
Investment mistakes are incredibly common—and completely understandable. They're not a sign of intelligence or lack thereof, but rather a reflection of how our brains are wired. We're naturally drawn to familiarity, pattern recognition, and the comfort of complexity that feels sophisticated.
The reality is that successful investing often requires doing the opposite of what feels intuitive. It means embracing global diversification when home feels safer, accepting that dividends aren't free money, and resisting the urge to tinker when markets get volatile.
This is why a systematic, rules-based approach matters so much. A well-constructed portfolio—diversified, low-cost, and aligned with decades of academic research—can help investors avoid these common pitfalls whilst positioning them to benefit from long-term market growth.
Of course, having someone in your corner doesn't hurt either. An adviser's job isn't just to pick investments, but to keep you disciplined during the inevitable moments when emotions threaten to derail your long-term plan.
One reason I'm confident discussing these pitfalls is that I've made most of them myself over the years. It's how we learn—and precisely why a rules-based approach, rather than gut instinct, tends to serve investors better over time.
Happy Thursday!
Kind regards,
George
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Important Disclaimer
This blog is for general information only and is intended for retail clients. It does not constitute financial or tax advice, nor is it an offer to buy or sell any specific investment. Since I don’t know your personal financial situation, you should not rely on this content as tailored advice. While we aim to provide accurate and up-to-date information, we cannot guarantee that all details remain correct over time. We are not responsible for any losses resulting from actions taken based on this blog’s content.
