Investing for beginners: 5 mistakes to avoid for Hong Kong investors

Having the right risk level that is aligned with your investment goals is paramount, and for DIY investors, if done right, self-starting a portfolio enables you to express your views in your portfolio. 

Investing for beginners is easier than you think in Hong Kong

Self-starters, those who prefer DIY investing, enjoy having more control over their money. By this stage, beginner investors should have gone beyond planning for emergency funds, and are looking forward to further maximise their savings for their financial goals.

At this point,  there are several new decisions that may be daunting, such as choosing the split between stocks or bonds, to focus on dividends, growth, or a combination of both. These questions are important to allow them to create a portfolio that aligns with their values, including sustainable or socially responsible investments. 

Starting to invest, investors will find digital platforms easy to access stocks, mutual funds, and other investment products with just a few clicks. However, investing directly in individual stocks/companies can prove to be risky. A smarter approach is to invest in low-cost mutual funds, like index funds, which provide broad market exposure through tracking the companies that are listed on these indices, such as the S&P 500. This diversifies your investments across many companies, overall mitigating the amount of risk you will take.

In Hong Kong, some prefer to invest directly in individual securities, while others choose funds like mutual funds or exchange-traded funds (ETFs) for broader investment exposure at a small management fee (it is important to learn the difference between the two). For instance, on the Endowus Fund Smart platform, investors can pick and choose their ideal investment portfolio by selecting funds from top-tier fund managers, all at a low and transparent cost.

After weighing the pros and cons of building an investment portfolio yourself, here are five pitfalls to watch out for as you start and continue to invest as a beginner in Hong Kong.

5 biggest mistakes beginners need to avoid

1. Lack of clear financial goals and failure to adhere to it

Where should I start if I want to start investing? As a DIY investor, the first mistake you can make is not having a well-defined investment strategy. Whether you’re an investing beginner or veteran, without clear financial goals or the time horizon to which you want to achieve them, you can end up chasing trends and making hasty decisions. This often leads to a mismatched, complicated portfolio that may not perform up to your expectations.

Essential steps to set up an investment plan:

1. Determine your investment objectives, risk tolerance, and time horizon
2. Research asset classes to build a balanced portfolio aligned with the goals
3. Review your investment plan periodically based on changes in life priorities

As an ongoing exercise, portfolio rebalancing is an essential step to realigning the portfolio weight to match the initial risk tolerance and investment goals, as market conditions continue to evolve. Investors should be aware of potential fees associated with portfolio adjustments. On Endowus, portfolios are automatically rebalanced to your pre-determined risk tolerance to ensure the portfolio remains aligned with its target allocation, all while minimising costs.

2. Putting all their eggs in one basket, or too many baskets

Achieving optimal diversification in your portfolio is key. Going too far in either direction can hurt your returns.

Under-diversification, or concentrating your portfolio in just a few holdings, makes it vulnerable to any downturns that specific sectors may experience. 

While diversification helps mitigate risk, over-diversification can dilute returns and complicate the management of your investments. Holding tiny positions in hundreds of stocks, bonds, and funds can make it challenging to conduct proper research and monitoring. This could lead to overlapping positions that provide the same market exposure, adding unnecessary complexity to your portfolio.

Many proceed to add more layers to diversify, such as geography, sector, industry, or style. This is where the misconception of variety being equivalent to diversification comes in. There is only so much risk that can actually be diversified to an optimal level — excess elements can in fact increase risk instead of reducing it. 

Remember, the goal of diversification is not to eliminate risk entirely, but to manage it in a way that brings the expected returns that compensate for the risk taken.

3. Trying to time the market

Relying on hot stock tips, rumours or hype without understanding the investment could lead to unwanted outcomes. While research and due diligence take time, it helps ensure you only invest in high-quality, suitable investments for your portfolio. 

Self-starting a DIY portfolio grants investors full control of their own investment decisions but is beneficial to obtain expert input and resources available. Endowus provides consistent market and personal finance resources and fund analysis for both advanced and beginner investors alike to help guide your decisions. We assess funds based on performance, fees, manager skills and track record, and more that complement your own research. 

In addition, Endowus Fund Smart is a platform comprising over 200 mutual funds where every fund undergoes a rigorous and ongoing due diligence process.  

4. Letting fear, greed, and hype take over

Feeling emotional about your hard-earned money is completely natural, but it's crucial not to let those feelings drive your investment decisions. 

Letting fear, greed or hype dictate your actions often ends badly. Panic selling when the market dips locks in losses, and overconfidence during bull markets might prompt you to make hasty, ill-considered decisions.

Echoing the first point, successful investing isn’t about outsmarting the market on a day-to-day basis; it’s about setting a course that aligns with your goals and sticking to it. 

This helps one resist the temptation to make knee-jerk reactions. Keep your eyes on the horizon—your long-term objectives—rather than getting tossed about by the market’s short-term ups and downs. 

5. Overpaying fees

Taking full control of your investment decisions also means managing the fees wisely. Most beginner investors are unaware of the layers of fees behind their investments. From subscription fee and transaction fees to trailer fees that may cause misalignment of advice, it’s important to know that high fees will erode your returns.

Predicting market trends may be difficult, but managing fees is something one can do. Fees have consistently shown to be a significant factor in determining long-term investment returns. However, in Hong Kong, fund investors are riddled with high costs. 

Take investing through retail banks as an example, subscription fee typically range between 1.5% and 5.0%, in addition to retail fund fees of around 1.5%. Endowus Fund Smart presents an all-in-one transparent fee structure, with over 95% of mutual funds being more affordable on Endowus than those offered by other fund platforms, banks, or financial advisors in Hong Kong.

Endowus Fund Smart: the smarter way to buy funds

As a DIY investor, the wide range of investment options available in Hong Kong can feel overwhelming. Endowus Fund Smart helps you cut through this complexity by providing access to a selection of Best-In-Class Funds in one place. You will have a curated selection of high-quality funds to choose from, across major asset classes and risk levels.

Mutual funds on Endowus Fund Smart are available in institutional share class, with an average fee saving of 0.5-3.5% per year versus retail prices. This can translate to additional returns over time. Endowus does not charge any subscription and redemption, wrap or switching fees and gives investors full transparency over any fund charges. 

Start today, with the smart way to buy funds on Endowus Fund Smart.

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