6 Mistakes Many Investors Are Making (and How to Avoid Them)

Here at Kernel we’ve seen so many investors make the same mistakes that hold back their returns and add risk.

So we’ve compiled a quick list of those mistakes, and a little general guidance on how to avoid them when using Kernel Shares & ETFs - the easiest way to invest directly in US shares and ETFs.

By nature, markets go up and down, so most investments will too (this up and down is called volatility). The key to reaching your goals is to take a long-term view - with time you can ride out volatility while you wait for the market to do what it does.

When the market does dip taking that long-term view can be really difficult, and many investors sell during this time.

A chap called Warren Buffet says rule one of investing is to never lose money, and selling during a dip is one great way to break that rule.

Investment fees can cost you tens or even hundreds of thousands of dollars over the long term, and high fees don’t necessarily correlate with high returns.

What’s tricky is that, at first glance, some fees might seem low or insignificant - just a fraction of a percent here or a small dollar amount there. But if you look closer at the fine print, you’ll often find a raft of smaller charges that can really add up as you start investing.

It’s important to look beyond the headline fee and understand all the costs involved.

For example, you might see a management fee of 0.5% or 0.6% and think it’s not much, but over time, even these small percentages can add up to thousands of dollars.

To put it in perspective, a 0.5% fee on a $10,000 investment is $50 per year, and as your investment grows, so does the fee.

That’s why it’s worth considering fees whenever you make an investment decision (you might as well keep that money in your pocket, right?)

• Fund management fees: every investment fund you buy, whether it’s an index, an ETF, or a managed fund will charge a management fee. This is charged as a percentage of your total invested and is generally higher for actively managed funds (often over 1%) , and lower for indexes (Kernel charges as little as 0.25%).

• Success fees: some active managers charge these when the funds they manage perform well. They’re usually around 0.2% but can be higher. Kernel does not charge success fees.

• Transaction fees: these are charged when you buy or sell investments. Some managed and index fund providers charge these (not Kernel), and most providers of US shares and ETFs do too.

• Foreign exchange (FX) fees: when you’re buying or selling investments from other countries the investment provider needs to convert your NZD into different currencies (for example USD). Many investment providers hide these charges deep in their FAQs, so make sure you understand them before you buy or sell.

• Other fees: some investment providers charge so many different fees it’s hard to keep track. This might include penalty fees when direct debits bounce, admin fees, membership fees, entry fees, exit fees and more.

Because there are so many fees you could be charged, it’s a great idea to make sure you fully understand the fee structure before you buy any investment. Those fees may seem like a small percentage, but they can make a huge difference to your returns over time.

For example, let’s say you and a friend invest $100,000 and make identical returns of 7% every year. If your fee was 0.25% and their fee was 1%, you’d end up with an extra $51,568.55 after 20 years of investing.

There’s a reason they always say not to put your eggs in one basket. The fact is, being overexposed to one company, sector, geographical area, or market leaves you vulnerable to unexpected events (and those seem to be happening every day recently).

To protect yourself from that volatility and risk it’s always better to diversify. To do this we generally recommend the core-satellite investment strategy - which means putting 80-90% of your portfolio into low-fee, broad-based indexes, then the rest into more speculative investments, like individual shares or thematic ETFs.

It’s a good idea to make sure your portfolio has exposure to different geographical areas and industries.

Read more about Core-satellite investing.

Most providers of direct US shares and ETFs in New Zealand operate in USD. That means, you’ll put NZD in your wallet, convert this to a USD wallet, then see the value of shares you’re buying in USD, complete the purchase in USD, then track their value and eventually sell in USD.

Understandably, it’s easy to make mistakes when you’re doing conversions with every purchase.

To help solve that problem Kernel Shares & ETFs did away with USD. We operate purely in NZD, meaning you’ll never need to do mental FX maths when you buy, sell or check your investments.

It’s human instinct to want quick wins and fast results.

That’s why so many investors keep their finger on the pulse of the market in the hope that they can buy and sell at exactly the right time.

The problem is, most professional active fund managers can’t outperform the market. In fact, S&P Dow Jones Indices found that when fees are accounted for over 80% of actively managed funds underperformed their benchmarks over the 10-year period ending December 31 2023.

In fact, the best way to generate consistent returns is time in the market, not timing the market. In other words, investing over the long term (the longer the better).

Doing this allows you to benefit from the magic of compound interest, which is when you start earning returns on your returns, which causes the value of your investments to grow exponentially.

There’s a reason why many indexes and ETFs focus on larger companies: these firms, such as Apple, Alphabet, and Visa, have established track records and are widely followed by investors.

While investing in lesser-known stocks can sometimes lead to higher returns, it also carries a higher risk of losses, and many may not outperform the market.Kernel’s selection includes shares in 500 of the largest US companies and access to 800 ETFs managed by established fund managers.

While these companies and funds have delivered positive returns in the past, it’s important to remember that past performance is not a reliable indicator of future results. All investments carry risk, and returns can go up and down.