Protect your money by avoiding these mistakes
1. Trying to strike it rich
Too often investors try to look for get-rich-quick investments. Speculation in the market is especially true when the market is rallying and success stories abound. The truth is those that make it overnight are far and few. Investment needs time to grow and definitely not without a well thought out strategy and framework for making investment decisions.
2. Following tips and impulses
Do you invest based on a stock tip, news or only after careful consideration?
Many people believe in making fortunes overnight. When they hear of a hot stock that will jump from $0.75 to $40 overnight, they immediately invest their lifesavings in order to have a chance at these overnight riches. When you ask them about the company they just bought and what it does, they have absolutely no clue. This is more like gambling than investing. Imagine how you would feel if the company dropped to $0.15 a share the following day. If you want to take a chance with stock tips, at least do your homework and find out the following:
- Is the company in a growth industry?
- Has the company had any problems in the past?
- Is the company profitable?
- Does the company have a low market capitalization, allowing room for growth?
- Does the company already have a high P/E ratio?
- What are the company's main operations/businesses?
The knowledgeable and prudent investor will do his own research and does not depend on heresay or ‘hot’ news.
Investors who plan on working with an adviser should check out the adviser's references beforehand in addition to this person's fee structure. Be aware that an adviser who works on commission has an incentive to buy and sell.
Even when you have a trusted advisor to manage your investments, it is recommended that you take an active involvement in learning about your investments and be in-the-know what your advisor is doing for you.
An advisor who is only familiar with managing investments linked to insurance plans possesses different qualities and skill set from one who is well trained and exposed to managing pure investment portfolios (stocks, mutual funds).
3. Timing the market
It is every investor’s desire to buy low and sell high. However, many investors who have tried to predict the market cycle have failed. No one can foretell the future of the market.
The best approach for the investor who invests for the long haul is to ignore timing entirely. This is difficult for most people but the following are reasons enough to support a long term approach:
Research has shown that a buy-and-hold strategy beats a trading or ‘speculative’ strategy.
No one has a crystal ball to tell exactly when the market will rally and when it will hit a trough. It is, therefore, fruitless to time the market to lock in profits.
4. Straying from your investment goal
The path to investment success is to stick to your investment goal. Suppose you are investing to secure your retirement funding trough a portfolio of balanced and fixed income mutual funds (unit trusts).
But when the markets show signs of a rally, you are tempted to reap some quick profits and you decide to adjust your asset allocation from a balanced to an aggressive portfolio.
What happens if the markets tank? Depending on the time line you have before retirement, this move could potentially wipe out your retirement nestegg and leave you with a battered portfolio.
Warren Buffett could not have put it more aptly: “Be fearful when others are greedy and greedy when others are fearful”.
5. Forgetting about Portfolio Diversification
Portfolio diversification is the mantra of investing. In choosing a property, we know it’s the location that matters. Similarly, with your investments, you have to diversify, diversify and diversify. It cannot be emphasized how important this is to one’s investments.
An investor who puts his money in a well diversified portfolio of say 8 to 10 stocks or mutual funds is in a far better position than another investor who prefers to bet all his money on 2 stocks.
Diversification is the spreading out of investments to reduce risks. Because the fluctuations of a single security have less impact on a diverse portfolio, diversification minimizes the risk from any one investment. Diversification involves allocating your money in different asset classes to achieve your target investment return.
