Investment is a tricky thing. It’s a matter of knowledge, perspicacity, risk, timing, business acumen, good management, and sometimes just plain luck.
But apart from all that, even the canny and the careful can make mistakes. Learning about what not to do can be the first starting block, the basic foothold from which you will eventually leap. Because investing, like everything else in life, is a very human engagement. We are busy people and we want to get ahead – often in a hurry and hugely focused by self-interest. Sometimes no matter much we think we know, even the best make mistakes. Here’s a few to watch out for:
Using money you can’t afford to risk
This not only creates stress, it is seriously unwise. Instead of careful evaluation and sound decision-making, you turn your investments into a gambling table. When you engage under pressure like this, you cannot control your emotions as you would like, and you tend to make decisions too quickly, based on negativity, greed or fear. These are invariably decisions which, under clearer circumstances, you might never have made at all.
Paying scanty attention to Due Diligence
Always do your homework on any shares you are thinking of buying. There are many things to evaluate, research and get good advice on. If you have doubts, ask. This is especially important regarding anything that may appear speculative and volatile. Take warning signs seriously, and never buy just because something sounds like ‘a good idea’. You should first assess potential risks, and feel confident with regard to all aspects of the company. A quality company should have growing revenues, an expanding market share, and proven management teams.
Lack of patience
Investing has been likened to watching grass grow. If you’re hoping for a quick return, then the stock market is not for you. Penny snatching from time to time might work, but overall you should be on the journey for the long haul. You need to keep your expectations realistic with regard to the length of time required for sound stock growth. Immediate returns are more imaginative than real. You’re investing in business and invariably business takes time to grow and mature before it can yield the kind of results you’re hoping for.
Failing to diversify
When building an individual stock portfolio, be sure to allocate to most major sectors. As a general rule of thumb, do not allocate more than 5% to 10% to any one investment. If you overinvest in one asset class or security, you are then assuming a concentration risk, and this will weaken your portfolio. Investments should cover equities, bonds, property and cash, providing exposure both locally and internationally.
Emotion over sense
We try not to think that fear and greed rule us, but they can be behind so many bad decisions. Try not to allow anticipation to overrule sense. There may be fluctuations, but over time stock markets tend to leverage good returns. Chopping and changing funds or asset classes, especially during periods of market turbulence, often leads to buying high and selling low. Stick to your plan and avoid temptations to switch.
Lack of understanding
Don’t invest in business models unless you have a good grasp of the business. The best way to avoid this is to build a diversified portfolio of exchange-traded funds (ETFs) or mutual funds. If you do invest in individual stocks, make sure you thoroughly understand those companies the stocks represent before you invest. Don’t be fooled by the hype of the latest trendy hot-stuff business. Yes, it may or may not be the next big profit machine, but you need to understand the business to gauge this. Spotting trends successfully in an industry means having acumen and sound investigation behind your decisions.
Following the crowd
This is often the worst thing you can do. Blindly following others when you have little experience or insight, can be dangerous. If a stock does well, it may be mentioned in the media as a good bet, but don’t jump in just because it’s something everybody else is doing. Jumping from one stock to another also leads to bad timing. Often by the time you get to hear about it, the stock has already reached its peak. Or it proves to be not quite the company you thought it was, a scam using current popular investment subjects such as marijuana or the resurrection of a defunct mine. Don’t follow fashion, always investigate.
Making decisions based on expectations that are too high
Low-priced stocks are not necessarily bargains. You need to be realistic about the performance of shares. Sudden fortunes are rare. Take note of the stock’s performance up to the point where you want to buy, gauge the performance of competitors in the same industry. While previous performance may not be indicative of what might come, you could get an idea of the volatility and trading activity of the underlying shares. Typically, a stock keeps a fairly steady track, acting mainly as it has in the past and in line with the overall industry.
Neglecting to get guidance – and neglecting to properly evaluate that guidance
Probably the biggest mistake of all is not getting professional guidance – or worse getting the wrong advice. Make sure that the person you engage to assist you on this journey is fully qualified and reputable. Many people will offer advice knowledgeably, but always seek out a person whom you can trust, and stick with them. A good investment advisor is someone who looks out for your benefit first. One true thing about the stock market is that no one person is 100% percent right all the time. Use your own due diligence and evaluations to complement any trading decisions.
And fees matter. A good advisor is going to be upfront and honest about the fees and the impact on your investments. If you follow all of the above advice, and the professional know-how of an accredited planner, you could be making all the right choices early on, and benefiting in later years.
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