9 ETF beginner mistakes you should avoid

Exchange-traded funds (ETFs) are a simple and low-cost way to start investing. That’s because a single ETF can give you access to hundreds of shares or bonds¹ in one go.

However, there are some common mistakes that can prevent investors getting the most from them.

1. Trying to time the market

Don’t wait for the ‘perfect’ moment to invest. The reality is that no one knows exactly what markets will do next. It’s far better to start now and then make regular, fixed payments over time. That way, you can focus less on when to invest and more on building your savings.

Starting sooner also gives your money more time to benefit from compounding – when you earn returns on the money you invest as well as on the returns themselves. Over the years, it can help even modest contributions grow into something much bigger.

2. Investing without a clear goal

Before you start, it’s important to be clear about what you’re investing for. Knowing how much you’ll need and when will help you to choose the right ETFs and work out how much you need to invest each month. 

Having a goal can also help take emotion out of investing. When markets move, it can be tempting to react. But changing course could take you further away from your goals. Instead, try to stay focused on the plan you started with.

3. Not thinking about your risk tolerance

Taking more risk offers the potential for higher long-term returns. But if you choose more risk than you’re comfortable with, you may panic and sell when markets fall – a decision you could later regret.

Being overly cautious has drawbacks too. Your money may not grow enough to achieve your goals.

The key is to choose an ETF, or combination of ETFs, that fits your goals, how long you’re investing for and your attitude to risk.

As a general rule, equity ETFs, which invest in company shares, offer greater long-term growth potential but tend to experience larger ups and downs. Bond ETFs are typically less volatile but may deliver lower long-term returns.

4. Not diversifying

Diversification means spreading your investments across different companies, industries and regions of the world. This reduces the impact if one area of the market struggles.

ETFs can hold hundreds, sometimes thousands, of shares or bonds, but they don’t all offer the same level of diversification. Some invest across several different countries and industries. Others focus more narrowly on a particular country or part of the market.

If you choose a more focused ETF, think about how it fits alongside your other investments and whether your money is spread wide enough.

5. Buying too many ETFs

Having more ETFs doesn’t necessarily mean a more diversified portfolio.

For example, a global ETF and a US equity ETF may both hold large positions in Apple, Microsoft and Nvidia, so there can be a lot of overlap between them.

Having lots of ETFs can also make your portfolio harder to manage. It could increase your costs too, particularly if some ETFs charge higher fees than others.

For many investors, one or two diversified ETFs may be enough, although there’s no single right approach. What matters is having a spread of investments that suits your goals, whether through one ETF or several.

Read more about building an ETF portfolio.

6. Chasing past performance

It’s easy to be drawn to an ETF that’s been performing well. But strong past performance doesn’t mean it will continue to do well in the future.

Rather than focusing on recent performance, look at what the ETF invests in, how diversified it is, how much it costs and whether it fits your goals and attitude to risk.

7. Panic-selling during market downturns

Market declines are a normal part of investing. But when markets fall, it can be tempting to sell your investments and wait for things to settle down.

The problem is that markets can recover just as quickly as they fall. If you sell after markets have dropped, you could lock in losses and miss out on the recovery.

That's why it's important to focus on your long-term goals rather than short-term market movements.

8. Ignoring costs

All ETFs have an annual charge, known as the ongoing charges figure (OCF). Differences in charges can look small, but over time they can add up and eat into your investment returns.

That doesn’t mean you should automatically choose the cheapest ETF. Cost is one factor to consider alongside things like what the ETF invests in and how well it fits your goals. The aim is to find an ETF that offers good value for what you need.

9. Never reviewing your ETF portfolio

Building an ETF portfolio isn't a one-off task. Over time, some ETFs may grow faster than others, changing the balance of your portfolio.

Review your portfolio from time to time to check it still reflects your goals and the level of risk you're comfortable taking. Making small adjustments can help keep your investment plan on track.

Learn more about how to rebalance your portfolio.

¹ Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.

Investment risk information

Investing gives your money the opportunity to grow over time, but market movements mean values can rise and fall along the way.

ETF shares can be bought or sold only through a broker. Investing in ETFs entails stockbroker commission and a bid-offer spread which should be considered fully before investing.

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