There is a lot of talk about how to invest correctly. Today we’ll talk about how not to do this. Let’s take a look at the most common mistakes novice investors make and how to avoid them.
Lack of a financial goal and a plan for its implementation
A correctly set goal is already half the success in any business. Investing is no exception. If you do not have a specific goal, then you will not be able to correctly build an investment strategy. And your investments run the risk of becoming ineffective. Before you start investing, you need to clearly define your financial goal. It should be as specific as possible and answer two basic questions. How much money do I plan to earn on investments? For what period do I plan to earn this amount? Answers to these questions will make it possible to build an investment strategy and choose financial instruments for its implementation. For example, saving for a car in three years or reaching a stable passive income in 20 years are completely different goals that require a different approach.
Lack of financial cushion and investment of the last money
Many people mistakenly think that investing is similau to a financial cushion. In fact, these are completely different things. And you can allocate money for investments only when you have formed a reserve fund. The size of the reserve fund must be at least three monthly salaries. This will allow you to maintain a comfortable standard of living in the event of force majeure. You never know when and for what reason you may need money urgently. Therefore, you should be able to access them at any time. If you will direct all your savings to investments, then there are several nuances. Firstly, there is no guarantee that the investment will be successful, and you will not be left completely without money. And secondly, you may need money just at the moment when your investment portfolio is in drawdown. In this case, you will have to sell your assets at a loss. Therefore, it must be remembered that an investment portfolio cannot function as a financial cushion.
Many expect too much from an investment. And when their expectations are not met, they are disappointed in the possibilities of the stock market. Therefore, you should not initially count on a high return on investment. In this matter, it is better to be realistic, and even better – a pessimist. High profitability is possible only with very large investments or the use of high-risk instruments. Therefore, if you are not going to risk a large amount of money by investing in instruments with a high level of risk, then do not expect quick and very large returns. The most rational thing is to analyze the market and calculate the approximate amount that you can get from your investments.
Investing in untrustworthy projects
Promises of high returns can be confusing for inexperienced investors. You need to remember once and for all, anything that guarantees you a high income is almost certainly a fraudulent project.
Financial markets are a very unpredictable system. And nothing can be guaranteed here. Even large brokers always warn that they do not give any guarantees, and that past performance does not guarantee the same level of income in the future. Therefore, if you are promised that your investments are guaranteed to provide you with payments with a high interest per annum, then you can be sure that there are scammers in front of you. Giving your money to such projects is the same as throwing it out the window. You won’t see them again.
Lack of diversification
Diversification of an investment portfolio is the main way to minimize the risk of its drawdown. Diversification is necessary both in terms of instruments and by sectors of the economy. Investing all the money in companies in one sector of the economy or in the same instruments is rather unreasonable. Even if it seems to you that, for example, the oil and gas industry is stable enough to have in its portfolio the assets of only issuers working in this area, this is the wrong approach. The market situation may change at any time, and the value of the shares of these issuers will fall in value. Accordingly, the value of your investment portfolio will drop sharply. Therefore, it is much more rational to include in the investment portfolio not only different asset classes, but also to diversify them by economic sector, country and even currencies. This will minimize the risk of an investment portfolio drawdown and reduce potential losses.
Making investment decisions in the face of uncertainty
Any decision will be effective only when there are necessary conditions for its adoption. Financial market analytics is an important part of an investor’s work. It is worth making decisions on the sale or purchase of assets only after a thorough analysis of the market situation. Otherwise, the deal may be unprofitable. And instead of the expected income, you will receive losses. In-depth research is not always necessary. Sometimes a superficial analysis of the market situation is enough. To do this, you need to study current news and events in the global economy. For these purposes, it is convenient to use such a tool as the “economic calendar”. This is a service with which you can get information about relevant news in the field of economics. Typically, such instruments are freely available on the websites of brokers or financial marketplaces such as Asset Capital Business or VT Markets. If conducting independent fundamental analysis is too difficult for you, then you can use materials from professional analysts. Market research reviews can also be found on the websites of brokers, investment companies and marketplaces. However, you should be careful to listen to other people’s advices. Information from unverified sources can only harm your deposit.
Unreasonable level of risk
The higher the income, the higher the risk – this is the basic pattern of investing. Therefore, it is most rational to find the “golden mean” that will provide a balance between risk and return. Aggressive investment portfolio involves concentration on high-risk assets. It should be borne in mind that this strategy is not suitable for everyone. High-risk instruments can bring an investor both big profits and big losses. The strategy of total risk avoidance will also be wrong. In this case, the investment portfolio, which consists only of conservative instruments, will lose its effectiveness. In addition, it will not be possible to completely avoid the risk in any case. Even by investing money in deposits, you cannot be sure that your investments will not be depreciated due to inflation. Therefore, as already mentioned, the investment portfolio must be properly diversified. It is most preferable to distribute assets in such a way that the ratio of high-risk and conservative instruments is approximately the same.
Making hasty decisions driven by emotion
All investment decisions must be taken with a cold head. Under the influence of emotions, the investor can misjudge the situation and make a mistake that will cost him or her money. Fluctuations in quotations and periodic drawdown of the investment portfolio are absolutely normal. Therefore, you should not panic and rush to sell or, conversely, buy assets. This is the most common mistake among aspiring investors. When the share price starts to fall, most investors start to get rid of them, fearing further fall. As a result, this leads to losses. Experienced investors, on the other hand, prefer to hold or buy shares at the lowest price. Sooner or later, the trend will reverse and the value of the stock will start to rise again. The one who did not succumb to panic and general mood will save his or her money. It is the ability to control your emotions and plan for the future that distinguishes experienced investors from beginners.