At school, work and during retirement, we are encouraged to save money.
It begins with the ‘piggy bank’ we are given as children and is reinforced with encouragement from our parents. We’re asked to save our pocket money for larger items rather than spending it all each week on sweets and chocolate.
Whether that behaviour takes hold or not, later in life we are auto-enrolled into workplace pension schemes. These attempt to automate the process of saving a little more each month. Employers help further by offering incentives such as the ‘matching’ of contributions.
Everywhere we look, we are advised to save. MoneySavingExpert.com, financial advisors, even the government.
But can one save too much? Could someone take saving too far?
What can go wrong?
It’s an interesting hypothetical to explore, so let’s take a look at some extreme examples of what can go wrong.
We will explore each of the points below in its own short article.
1. Investing too much into a single investment
This mistake is as the title describes – committing a huge portion of your wealth into a single company or investment product.
This goes against the ‘don’t put all of your eggs in one basket’ mantra, but believe it or not, this is still a very common mistake. Investors feel they have good reasons to do so at the time.
2. Investing across too many different accounts and asset classes
In our free investing courses, you’ll often see references to ‘asset classes’. If you haven’t heard of an asset class before, it’s the term given to different ‘groups’ of investments that have similar characteristics.
A mistake made by more experienced investors is to spread themselves too thinly across asset classes. From a diversification perspective, this is laudable.
The downside of placing too little in too many different investment platforms and accounts is not what you’d expect… it’s the fees and charges which will begin to erode your returns. Having trouble choosing what to invest in? Investing a little bit in absolutely everything is not often an economical way to invest a small sum like when investing £1,000.
3. Making too many trades to buy and sell shares
The data shows that this is a bigger issue for male investors rather than female investors.
This is the curse of over-trading, and we have devoted an entire article to this controversial topic.
4. Prioritising saving above spending in an extreme manner
If you’ve looked around the web for interesting investing 101 guides, you may have landed on a FIRE website. FIRE stands for Financial Independence, Retire Early.
While I would also like to retire by 50 I have not focused Financial Expert solely to the topic of achieving financial independence.
Passionate followers of FIRE techniques try to live on as little of their income as possible. Some go as far as to live out of a camper van and become experts in all manner of handicrafts to allow them to lead an extremely frugal lifestyle.
Frugality isn’t the objective – it’s the tool to save and invest enough money to leave employment at a young age. It’s possible, it’s exciting, but it isn’t for everyone.
After following each scenario through to its logical conclusion, it has become clear that as with any pursuit – taking investing to an extreme will eventually cause problems.
Whether it’s running out of cash, incurring excessive costs, or sacrificing your quality of life, these are just some of the unfortunate consequences of getting it wrong.
It’s definitely worth putting in the research upfront before you spend your first penny. This will reduce your chances of making mistakes which you may later regret.
To help, I would recommend our free investment training for a comprehensive suite of articles or perhaps take a look at our beginners guide to investing if there’s a particular element that takes your fancy.