Investment can be overwhelming for those who are just starting out. With the goal of earning as much money in a short period time as possible, people are vulnerable to committing mistakes. Such mistakes can be fatal to your money, if not addressed well. The first step in addressing the mistakes it to determine them.
Below are the list of 5 things that investment newbies commit as observed by the author.
Mistake #1 – Putting your eggs all in one basket –
Take this idiom literally – imagine putting all your eggs in one basket. If that basket falls, your eggs go down with it. Same thing is true with investment. If you put all of your money in one company and that company’s finances collapse, you lose. The key is to have a diversified portfolio.
As the name suggests, having a diversified portfolio means putting your money in other avenues available to you. You may opt to invest part of your money in a petroleum company and invest another part in another line of business. This gives you a protection that if one business fails, you still have another investment that you can bank on. Although diversifying your investment does not guarantee that you will earn, it lessens the risk of financial loss.
Mistake #2 – Over diversifying portfolio
While investment diversification is a proven way to mitigate loss, don’t get carried away with the idea that your money will surely grow.
Over diversifying is also something that we should be weary about. If you diversify too much, you may minimize the risk of loss but you may already miss the opportunity to gain more.
– if you over-diversify, you risk not getting the full potential gain of your money when the value goes up.
Let us take for example a person’s meal. We should have a balanced diet. Protein is healthy and
should be included in our meals. However, having too much protein is bad as it can lead to diseases such
as gout. Same is true with investments and other aspects of life. Having too much of anything
can cause damage.
Mistake #3 – Not reading or making a research on investment.
Read. Read. Read. This may sound cliche but it is time-proven and tested by the most successful entrepreneurs. Educate yourself at least on the basic foundations of investment. While there are bankers and financial advisors whose jobs are to help you make financial decisions, it is best that you know what you are getting yourself into.
Listen to your financial advisor.
Hear what they have to say. But the final decision on where to invest your money should be yours. It is your money after all. You are the one whose wealth is at risk.
Read books on investment. Read stories of people who have succeeded in this field. Educate yourself enough to be able to make a sound financial decisions. As Warren Buffet said: “The best way to think about investments is to be in a room alone with no one to bother you. If that doesn’t work, nothing will.”
Mistake #4 – Investing money for a short period of time.
Returns from investment does not happen in a short span of time. A common mistake of first-time investors is that they focus on returns per month.
They fail to realize that investment is a long-term commitment of your money. Instead of thinking short-term and imagining how much returns you will get in a month, think of how much you will get in a year. Long-term investments tend to have higher returns whereas short-term investments often have lower returns.
If your goal is to earn money from your investments, you are putting unnecessary pressure on yourself. Such pressure leads to over trading or over-investing – both have a negative impact on your returns.
Mistake #5 – Not Getting Yourself Protected Before You Invest.
This can be a deadly one. We’re not financial advisors but this is important before you even start investing. There cases of people who build a great amount of wealth only to lose it when an illness strikes them unexpectedly.
Life is definitely unpredictable and it’s always good to ensure that you’re covered before you start investing. Otherwise, all your time and effort can be erased when something unexpected strikes. Talk to your financial advisor if you haven’t got this covered yet.
Summing It All Up:
It is true that mistakes are inevitable. However, knowing the common mistakes of new investors could help prevent yourself from doing the same. Knowing that something is wrong is just half the battle. Correcting the wrongs is another thing. In every financial decision you make today, remember that it could determine your wealth in the future.
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