- January 11, 2021
- Posted by: Diasporapi
- Category: Economics
Investing is the only way to grow your wealth right now.
But, investing can also deplete your savings faster than you can realize if you don’t do it right.
You must’ve heard about both of these scenarios from others. And the fact is – both are true.
In short, investing is a double-edged sword.
So, how can you avoid cutting yourself from it?
The answer is gaining enough knowledge and experience to know both – the risks and rewards of investing.
However, gaining knowledge is easier said than done. The internet is flooded with thousands of articles on how to invest properly. Almost every article details a different method/idea to start investing, making it difficult for beginners to know the right from the wrong – which leads countless investors to make mistakes.
That’s why we have listed some of the common mistakes that investors make and also discussed what you should do to avoid the same.
Mistake #1: Investing without understanding the risks
No matter how safe an investment opportunity might sound to be, an investment always carries a risk – the risk of losing a fraction (or even a chunk) of your capital.
You must always evaluate an opportunity based on how risky it is, and not on how rewarding it can potentially be. You can learn more about the risk profile of an investment instrument by researching on the internet – which includes reading articles and asking questions on public forums.
Two of the common types of risks involved in almost all investment opportunities are:
Losing your principal – Investing in individual stocks or high-risk/high-reward opportunities, like forex, could cause you to lose everything in the case of any unfavorable developments in the market.
Losing value with inflation – If your investments appreciate at a value less than the inflation rate of your country, your capital investment will depreciate in value with every passing day. This defeats the whole purpose of investing.
Mistake #2: Investing without adequate knowledge
While understanding the risks involved can help you make better investment decisions right off the bat, there’s only little you can do in face of unexpected market developments.
In such cases, only adequate market knowledge can be your savior. With proper knowledge, you can make decisions on:
Tackling market swings/fluctuations – This includes both – daily and long-term fluctuations. Depending on your investment term, you can evaluate how responsive/sensitive your investments can be to these market changes and, consequently, what you must do under such circumstances.
Allocating your resources – While aiming for higher returns on your entire capital investment, it’s better to allocate your resources proportionately between higher and lower risk investments. This ensures you get the expected returns without raising the overall risk profile of your portfolio.
Mistake #3: Not having a plan
Your investment plan/strategy is what determines the long-term success of your investment actions.
Investment planning and financial planning are dependent on one another. Your investment plan should be aligned with your financial goals and must match your financial resources.
Forming an investment plan includes:
Determining goals – This includes both – your short-term and long-term goals, such as paying off your credit card bills and planning for your retirement. You must make sure to set realistic and achievable dreams.
Creating a timeline – Once you’ve defined what you want to achieve, it’s time to determine when you want to do it. Every goal – no matter how small or big – must follow a strict timeline, and you must try to adhere to the timeline you’ve set. This will not only determine the success of the goal in question, but also that of the others following it.
Mistake #4: Not diversifying your investment portfolio
Diversification reduces the overall risk profile of your portfolio while ensuring you get the desired level of returns on your capital investment.
Diversification can be a long and complicated process that involves numerous (and equally important) investing strategies. Here are a couple of such measures you can undertake to diversify your portfolio:
Invest in different asset classes – Meaning – you shouldn’t put all your money into one instrument, like stocks or bonds. Diversifying your capital in different assets/securities ensures you don’t lose all your money at once, even if the market falls.
Re-balance your portfolio – Diversification isn’t a one-time job. After you’ve diversified your portfolio, favourable and unfavourable developments can tilt the original mix of assets in your portfolio. So, you must re-balance your portfolio at least once every year to ensure that its risk profile and return potential remain intact.
Mistake #5: Relying on deceptive sources
Relying on unreliable and untrustworthy information sources is worse than investing without adequate knowledge, as it can expose you to scams and frauds.
In extreme cases, con-men and fraudsters even put up posh and sharp looking office spaces with every detail distinct to an actual firm/office – all to lure you into investing your hard-earned money.
Here’s how you can avoid falling prey to such shams:
If it’s too good to be true… Then chances are that it isn’t. Only skepticism can be your savior here. Don’t believe anyone promising you higher returns with little-to-no risk. Before investing, be sure you know very well how rewarding the investment instrument generally is.
Check for regulators – Every reliable fund or investment opportunity, no matter how small, is under the supervision of a regulator. While this doesn’t mean that those that aren’t regulated are always fraudulent, it’s better to not take any chances.
The CMA or Capital Markets Authority regulates the capital markets of Kenya. You must always check the CMA regulation before investing. For example – Forex traders must always check if their forex broker is regulated by CMA or not. Likewise unit trust, investment managers must also be checked on CMA website.
Mistake #6: Investing with emotions and bias
Emotions can sway your judgement and make you incur heavy losses, even if you’ve got the adequate knowledge to invest.
Behavioral impulses include making rash decisions, investing with bias and trying to predict market movements without enough experience.
Best way is to avoid this to follow your plan and analysis, not your feeling. And when needed, reevaluate your portfolio and Seek professional advice to keep you on track.
Mistake #7: Holding on to failing investments
Sticking to one investment for too long and holding on to an investment that has been losing value are equally comparable to making a bad investment.
While holding on to growth stocks can be very beneficial in the long run, you must never hold on to an investment that is declining in value. This not only increases the risk of making a loss but also decreases the purchasing power of your capital. You must evaluate investments without any preferential bias.
Two ways to make sure that you don’t hold to a bad investment are:
Stop-loss orders – Stop-loss orders are placed to limit your losses by automatically exiting an open position once a trade/investment reaches a certain price. Setting stop-loss orders on all your investments is a good way to make sure your losses remain in check.
Evaluating objectively – Right after making an investment, you must decide the conditions under which you would sell it off. If ever you’re torn between whether to sell an investment or keep it, you can try asking yourself – “Will I invest in this opportunity now?” If the answer is “No,” (or even “Probably not”) it may be time to liquefy your investment and re-invest the capital in a better opportunity.
Mistake #8: Procrastinating and Overthinking
Both procrastinating and overthinking can push you towards making bad decisions – including failing to seize the most opportune moments that could’ve otherwise helped you amass a lot of wealth.
While both are unproductive, procrastination signifies waiting for longer than you should before making an investment. Overthinking revolves around worrying too much over the investments you’ve made and, thus, wasting your time and resources.
Here’s how you can avoid procrastinating and overthinking:
Start early – Investments and savings both work on the principle of compounding of returns. This means at a return rate of 10%, you can make more than 2.59 times in 20 years compared to what you can make in 10 years – no matter the capital amount. As the interest rate and the time difference goes up, the returns also increase at an exponential rate.
Stick to your plan – We have already talked about setting financial goals and making informed decisions. Once you’ve made an investment following these steps, you should trust your judgement and patiently wait for the investment to become fruitful. Try to avoid losing sight of your plan, even if the daily fluctuations seem to be unfavorable.
However, that doesn’t mean you should just invest and forget. The point here is, the more frequently you look at your investments, the more anxious you’re likely to become – which is what you must try to avoid.
Mistake #9: Investing greedily
The greed of growing rich fast is common among beginner investors. It can lead you to incur heavy losses.
If too many investors invest in an opportunity, asset bubbles are created – making the asset/security worth more than its intrinsic value. All asset bubbles eventually burst and the price of the asset crashes, making the investors incur heavy losses.
Here’s how you can avoid greed-driven investing:
Avoid herd instinct – Herd instinct signifies the act of following what others are doing, instead of relying on your own analysis. Avoid investing where too many investors are flocking – no matter how beneficial the opportunity might seem to be.
Invest in undervalued assets – Always search the markets for undervalued assets. Once the asset is recognized by other investors, it’s bound to rise in demand. That’s when you must sell it off and start searching for the next opportunity.
Mistake #10: Investing with the wrong brokerage
Investing with the wrong brokerage is similar to investing with an unregulated brokerage.
The brokerage you invest with must have jurisdiction in Kenya. If not, you won’t be able to seek legal aid if something goes wrong. Here are the two financial authorities of Kenya you must know of:
Capital Markets Authority (CMA) – The CMA regulates all capital market activities in Kenya including – Capital Market Exchange (NSE), Investment Management, Investment Advisors, Unit Trusts, REITs, online forex trading in Kenya. You must always make sure that the brokerage or firm you invest with is licensed by the CMA.
Nairobi Securities Exchange (NSE) – When investing in stocks and indices, you should invest with brokers that are listed on NSE website.
Mistake #11: Not considering your risk appetite
Investing more than they’re willing to lose is just as common among beginner investors as the greed for higher-than-normal returns on their investments.
Remember, investments always carry some risk. That’s why you must never invest than you’re comfortable losing.
Here’s how you can invest considering your risk appetite:
Invest based on potential losses – You must always evaluate an investment opportunity based on how much you potentially lose and not how much you hope to gain. This will ensure that you don’t end going bankrupt if things go as you expected.
Only invest up to 15% – Experts and financial advisors usually recommend investing no more than 15% of annual income as a beginner. Once you’ve saved enough and gathered adequate knowledge/experience about the markets, you can consider investing a larger portion of your income.
Have you made any of the mistakes listed above? If you have, don’t fret – it’s better late than never to rectify your actions. And if you haven’t, we hope these tips can help you grow as an investor.