Mistakes can happen to anyone.
This is also true in investing. However, you don’t have to be financially savvy to create an investment plan that suits to your investment goals. There are only a handful of important decisions to make, and each of them is simple enough that anyone can make them happen. Being an investor for more than two years, let me share with you some common mistakes you should avoid in investing.
1. Investing without defining your financial goals
One common mistakes of any investor is to unable to establish clear financial goals. Therefore, it’s good to figure out your purpose of investing from the start. Financial goals can be categorized into three: short-term, mid-term, and long-term financial goals.
Short-term goals are priorities that can be accomplished in short period of time and can be achieved within the next years like paying off small debts, purchase of household furniture, and minor home improvements. Mid-term goals on the other hand are priorities that can be accomplished within two to five years like buying a brand new car. Long-term financial goals involve financial plans that are more than five years to accomplish and require disciplined saving and investing strategy. One good example is planning for retirement and saving fund for your children’s college education.
2. Investing without an emergency fund and protection
It is a common mistake to begin investing without an emergency fund and protection like the insurance. Whenever you make financial decisions such as investing in mutual funds and equities, remember that having emergency fund and protection are contributing factors to the success of your investment journey.
When unforeseen emergencies arise in the form of illnesses or accidents, you will not be obliged to use the investment fund. However, failure to have the insurance and emergency fund would result to ruining your investment plans.
3. Failure to understand how to assess or manage risks
Risk has always been associated with any forms investment programs. Sad to say, some people have remained careless and neglected to do their homework. When I started investing in mutual funds, I was informed to answer the entire risk assessment questionnaire to identify the risk level tolerance, whether I am aggressive, conservative, or in between.
If you are into a business venture or any other forms of investments, you have to understand that you might lose significant amount of money suppose you failed to manage the risk.
4. Failure to diversify your investment portfolio
Diversification in investments simply means having your money spread across a lot of different things.
A simple way of explaining this is you should avoid putting all eggs in just one basket, instead put them in different types of assets – cash, bonds, stocks, real estate, etc. If you’re into stock market, you might consider investing to different companies like mining corporations, food industries, and financial institutions.
5. Engaged in investing you don’t fully understand
So, your close friend in high school has approached you to invest your money into a real estate business? What would be your response? If the business model is vague and he fails to explain how to gain potential return, simply learn how to say no.
One of the world’s most successful investors, Warren Buffett, cautions against investing in businesses you don’t understand.
6. Investing without mentor or coach
Successful people usually have great mentors. Why financial mentor is necessary? Well, it so important because mentor has been there and that you don’t have to repeat your mistakes over and over.
Personal finance and wealth building principles for instance are two of the most daunting yet important lessons you can undertake while investing. When I say mentor, what I mean is an experienced and committed person who would teach you along the whole process of investing.
7. Focusing on short-term investment only
While you can make money quickly with a short-term investment strategy, it can entail significantly higher risks. In addition to greater potential risk, there are other disadvantages to short-term investing. For instance, holding onto short investments programs can incur expenses, thus charging you higher brokerage commission fees. In addition, it’s not always possible to earn profits in a short period of time.
Some investments usually perform better and have gain possible high returns when it is long-term. A good example of this is investing in the stock market.
Are you ready to invest? There is no right or perfect time but right now!
For though the righteous fall seven times, they rise again, but the wicked stumble when calamity strikes. Proverbs 24:16 (NIV)
JUN AMPARO is the author of OMG! OFW’s Money is Gone: Practical Tips on How to Be Wise with Your Hard-earned Money which was featured at GMA News Online. Being an OFW for over a decade, he’s aware about the common financial challenges of many Overseas Filipino Workers.
Jun is investing in mutual funds and stock market for over three- years and conducts financial literacy seminar.