The best investment you can make in an investment in yourself…The more you learn, the more you’ll earn. – Warren Buffett.
For sure, no one has a ball of fortune to predict the future, however, by learning tips to avoid bad investments and making a conscious decision, some of the common investment mistakes can be avoided.
Investment is not something which should be refrained, it is an integral part of living. Everyone invests expecting future financial security. You invest your money in stocks or fixed deposits so that in future you can spend the return on your education, dream vacation and retirement etc. The investment makes you financially secure and keeps the stress away during unexpected circumstances like the current pandemic situation.
However, you can only win the game of investment when you avoid some of the common mistakes. Here are tips how to avoid bad investments:
- Avoid Buying Shares of Business that you do not understand:
Most of the novice investors get pulled towards the latest “hot” or fancy-sounding industry. They may know very little or completely nothing about the tech or biotech industry, but they simply follow the crowd and invest in such industries expecting a high return.
Investing in a business about which you hold good knowledge comes with several built-in advantages and this one of the imperative steps to avoid investment mistakes. For example, if you run a restaurant you would already be knowing the business involved with the restaurant franchising. And since you are in the industry, you will already know if the industry is getting slower, booming or cooling down, before the other investors who don’t belong to the industry. Moreover, when you invest in the industry you are already in, you already know the trends, which enables you to make great investment decisions.
When you invest in a company that is above your grade, you might not be able to understand the complexity and subtleties associated with the business, until and unless you have already spent a good time in the industry. This does not mean that you need to be a medical professional to spend in the healthcare industry and IT expert to spend in Tech. However, this means that anytime you can have an advantage over other investors by spending in the business you understand.
- Try Diversification to Reduce the Risks:
There is a famous, used for investing for a long time now – “Don’t put all the eggs in one basket”. Diversification is one of the crucial steps to avoid investment mistakes. The probability of losses when you put all your money in investments or one type of company are more than you opt for diversification. Every business faces a threat, but when you have diversified your investments, the chances of losing money is less. Here are some of the suggestions of what all things you can put in your investment portfolio:
Buy stocks of different companies and companies from different industries, rather than investing in any single industry. You can divide the amount of money you are planning to invest in four parts and can spend in four different industries such as foods and beverages, AI and robotics, pharma and healthcare, IT Software and service.
Annuities come with guarantees that may be important to you. However, it is not a wise decision to put all your money, both taxable and tax-deferred in annuities as annuities have high fees and offer limited liquidity.
REIT or Real Estate Investment Trust is like a mutual fund that owns commercial real estate. Some REIT’s are a great investment, however, you should not spend a considerable amount in REIT’s.
- Understand what a realistic return is:
Understanding what is a realistic return, is one of the crucial steps to avoid investment mistakes. If you are lured by something which promises to bring you thousands of dollars every week and considering investing in it, then you should rethink your decision. No doubt, investments help in growing your money and bringing you financial security, however, that growth cannot be achieved in a month or two, it is a long-term process. Promises of high weekly returns are unrealistic and risky, and better be avoided.
Instead, look for a trustworthy financial advisor and plan wisely about long-term investments based on companies and industries that are growing, and are expected to grow even in the next 5-10 years. Ask as many questions as you can and try to get complete details about each company your financial advisor recommends you invest so that you have a good idea of where your money is going.
- Do not make emotional decisions:
Investing needs knowledge, understanding of the subject, skills and not the emotionally-taken decision and this is how you can avoid investment mistakes. Various factors affect the decision-making process and in many cases emotions are highly responsible for the outcomes of these decisions. When we make decisions, we often use emotional filters to understand the situation and predict the possible outcomes. However, these shortcuts to making decisions can actually cause havoc in our financial space.
Sometimes, you often make the mistake of purchasing stocks from the same company if you have a good experience investing in that company before. You think that this is a safe and reliable option, which will keep bringing you good returns, however, this is also an emotional decision. Take rational decisions based on the current market situation, future predictions and clear direction. Study the stock of the company and make use of technical and fundamental analysis.
- Don’t just follow the crowd:
This is one of the important tips to avoid bad investments, which every investor should keep in mind. A good investment strategy is to buy at low rates and sell high rates, but if you will just follow the crowd blindly, you will end up buying low and selling high. This may prevent you from taking advantage of the same marketing opportunities. A buy and hold strategy is often far superior than buying and selling.
Most of the time, if certain types of stocks double or triple in price, the mainstream media covers that move and makes it public how hot the shares have been. Unfortunately, by the time that the media shares the great performance of a particular share, that stock has already reached its peak. The investment is overvalued before the media coverage actually comes to picture.
This trend can be seen recently with Bitcoin. Bitcoin prices are upsurging exponentially, which is luring investors and making them to spend in this crypto currency. However, experts like Warren Buffett consider cryptocurrency and bitcoin as worthless and suggest avoiding investing in any digital currency.
Making investment is a big deal and it can be daunting as well, especially if you are novice to industry. It is nerve-wracking to risk losing any of your hard-earned money to wrongly made investments. We hope these tips to avoid bad investments might help you in avoiding investments that can be heavy on your pocket.
Do you know someone who is also thinking about investing money? Share these tips and help them get ahead!