We think that there are five common mistakes made by investors. These are the Cardinal Sins you need to avoid when investing your money. Understand these common mistakes and you stand a much better chance of being an investment winner.

1 – You pick funds or stocks based on their past performance

You will probably be familiar with the investment risk warning which explains that past performance is not necessarily a guide to the future. It is quoted by fund managers and investment advisers for a very good reason – it is true!

If you make your investment decisions based on past performance alone, you are likely to be very disappointed. Past performance is a great guide to where an investment has been but a lousy indicator of where it is likely to go next.

We often see ‘performance chasing’ where people invest near the top of an investment market, having just watched it shoot up in value. More often than not there is only one direction left for the investment to go, and it isn’t up!

Various studies have shown past performance to be an unreliable indicator of future performance. Others have demonstrated that funds which have outperformed a benchmark in the past are actually less likely to do well in the future.

2 – You try to ‘time’ the markets

If you believe that you can accurately and consistently pick the most appropriate time to invest your money, you are probably delusional. It can be tempting to delay making an investment, particularly when an investment market is volatile. The last thing you would want to do is invest today only to find out the market was cheaper tomorrow or next week.

The problem with trying to time your investments is it is too easy to miss out on the gains. The best stockmarket gains tend to happen very quickly, just as the most severe stockmarket falls are often concentrated in a relatively short period of time. Trying to time the markets can therefore result in you missing out on any fast recovery.

The best study looking at this was conducted by Fidelity. They looked at UK, US and other stockmarket performance between 1994 and 2009. They found that by simply missing a few of the best days of performance the overall result could be substantially different. Over the fifteen year period in the FTSE All Share Index, missing out on the ten best performing days would have resulted in a portfolio worth 46% less than one fully invested throughout the period.

The golden rule for investment is that it is ‘time in’ the markets that counts, not ‘timing’.

3 – You invest in things you do not understand

Investing money should be simple. At the most basic level, you have a choice between cash, fixed interest securities, company shares (equities) and property. The more risk you decide to take with your money, the better chance you have of higher returns.

Many investors try to overcomplicate things. They look for exotic investment ‘opportunities’ with the hope of breaking the unbreakable link between risk and reward. They are attracted by the prospect of double digit annual returns with seemingly no danger to their capital.

You should only ever invest in things you understand. Always apply the ‘ten minute bin test’ to your investment decisions. If you cannot fully understand an investment prospectus after ten minutes of reading, throw it in the bin and walk away.

The most effective investment portfolios are often the simplest ones. There is no need to chase complex investments when you have so much choice from the conventional range of investment asset classes. KISS – Keep It Simple (Stupid).

4 – You have too much diversification in your portfolio

Whilst you should never keep all of your financial eggs in one basket, there is also a danger that you can become too diversified when investing your money.

The idea of a diversified investment portfolio is to invest in ‘negatively correlated’ investment assets. This means that when one investment moves down, the others should move up, and vice versa. The impact of this negative correlation within an investment portfolio is what reduces the overall level of risk in a well diversified basket of investments.

As with anything in life, you can take this concept too far. More and more diversification with your investments will drive up costs, diminish the prospects for returns and make the business of managing your investments incredibly stressful.

5 – You never review your investments

Whilst there is a good argument for keeping your money invested for as long as possible, a regular review is also important. Things change over time when you invest money. These things include the overall asset allocation of your portfolio which can result in you taking more or less risk than you should be. Asset allocation changes occur naturally when different investment asset classes perform differently over time.

A regular review of your investments is also a good opportunity to identify and replace underperforming funds. Even with the best fund selection process in the world, it is possible to pick a dud from time to time. Fund managers go off the boil or change companies. Sometimes their strategies just don’t suit the current market conditions.

Rather than hanging onto an underperforming fund waiting for a miraculous turnaround, modern financial products make it simple and very cheap to cut your losses and move to a more suitable alternative. With most pension and investment wrappers these days you have the choice of an extensive range of funds from leading fund managers. Use a regular review of your investments as an excuse to ditch the laggards and appoint those with better prospects.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice.

The vast majority of products we review for our clients before making recommendation do what they say on the tin. They are transparent, competitively charged and reasonably simple to understand.

Then there are the others. Some financial products leave you wondering why they were designed in the first place. Here are five (in no particular order) that you should probably avoid, unless you have a very good reason.

1 – Structured investment products

You might be familiar with these if you have had any dealings with you bank during the past twelve months. They offer to ‘guarantee’ your capital but provide investment returns, typically as a percentage of stockmarket returns over a five or six year period.

With interest rates on cash deposits at an historic low and shaky investment markets, the banks appear to be resorting to the sale of these products to earn the much needed commissions to rebuild their balance sheets.

The healthy levels of commission they pay to the ‘adviser’ is probably their only attractive feature, and that isn’t going to benefit you as the investor. If the stockmarket falls, you get your original capital back, assuming that is the financial institution providing the guarantee is able to meet their liabilities at the end of the term. If the stockmarket rises, your returns are likely to be capped, so you don’t benefit from the entire increase.

Comparing these products is made challenging by their differing features. They also tend to have a limited shelf life, with the products sold in ‘tranches’ until that allocation runs out and a new product is designed.

2 – Equity release

Our ageing population with limited pension provision often considers the value in their properties to be a useful source of capital or income in retirement. Equity release products are effectively mortgages for older people, offering access to that cash in your home at the time you need it most.

Most are expensive and inflexible. They should only ever really be considered as a last resort for people in need of cash in retirement.

There are two main types to consider – ones where the interest charges on the mortgage ‘roll up’ and ones where part or all of the property value is sold to the equity release provider.

With the former, you are paying interest charges on interest charges. The compound effect of this can make it an incredibly expensive proposition, particularly if you live for longer than expected. With the latter, you are unlikely to receive anywhere near the true value of your property. A typical value paid is 40-60% of the property value.

The inflexibility of these plans make them difficult to deal with should your circumstances change during retirement. They can also result in little or no value being left to pass on to your beneficiaries when you die.

3 – Payment Protection Insurance

Payment Protection Insurance (PPI) is often sold alongside mortgages, personal loans and credit cards. It aims to offer you some financial protection should you lose your job and be unable to keep up payments on your debts. The reality when you come to make a claim can be very different from what you expect.

There are clear rules about how PPI should be sold with loans, but research from Which? has found over one million mis-sold policies. PPI is not compulsory when taking out a loan. Some sales advisers will lead their customers into believing this is the case to make a sale and earn their commission.

PPI is an incredibly expensive product and the claims records of providers should not give you much confidence that any claim would be met, particularly if you are self-employed where additional exclusions often exist.

As an absolute minimum you should shop around to find the best deal. The PPI policy on offer from the same provider as your loan or credit card is unlikely to be the most competitive. You should also read and re-read the small print to check for exclusions and make sure that the policy will actually cover you given your personal circumstances.

4 – Store cards

Store cards are just like credit cards, but with typically much higher interest rates and restrictions on where you can use them. For people who are unable to repay their balances in full each month, the use of a store card can result in punishing interest charges.

Retailers try hard to tempt people into signing up for store cards, often using the lure of a special introductory discount on the items you are buying that day. Their simple aim is to get a store card into your purse or wallet as you are then more likely to rack up expensive debts in the future.

There are better (and cheaper) ways of borrowing money. A credit card with a competitive rate of interest gives you the added benefit of being able to shop around for the best deal from different stores. With a store card you are hit twice, by high interest rates and the lack of ability to shop around for a bargain.

5 – Any financial product you do not really understand

If you cannot fully understand the mechanics of a financial product within five minutes of receiving an explanation from a competent financial expert, you should probably walk away. The best financial products are usually the simplest.

Complexity is sometimes built into financial products to make them more alluring to investors who feel they are accessing something particularly special that is going to make them lots of money. The reality is complexity can hide a multitude of sins.

Difficult to understand financial products are those most likely to give you grief in the future. There is no need for complexity in your financial planning. Simple works and has been proven to work for centuries. Complex comes and goes depending on market conditions. Today’s complex fad could be tomorrow’s mis-selling scandal.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice.