One of the biggest mistakes that an investor can make is failing to set aside money that could help them out in the case everything else fails.
This year has not been rosy for business. And investors have not spared the wrath of the pandemic. It is a rough time to try understand exactly where to put one’s money. Those who have made investments are staring at possible losses.
But investors have to keep taking risks and looking out for ventures through which they can multiply their money. To avoid taking the risk is to muffle the very essence of investment.
When the markets begin to stabilise, investors will have two worries. One, that they missed the market bottom and it’s too late to invest. Two, that another drop is possible, so it might be better to keep cash instead of investing to avoid market volatility.
But with uncertainties, what are some of the worst and most avoidable mistakes an investor could make?
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1. Knee-jerk reactions
Oftentimes, when situations are not favourable in the market, there is temptation to make decisions based on current market situation, and dependent on what has transpired in recent moments. Such decisions may include selling shares off the stock market with the future looking bleak and uncertainty lurking.
Such knee-jerk decisions may end up killing potentially good investment options, and it is thus important to base decisions on the medium to long-term and to avoid being driven by sudden changes in the market in decision-making.
Decisions in investment require long serious deliberation and careful decision-making. Rash, poorly considered decisions could badly hurt investment.
Berkshire Hathaway founder and billionaire CEO Warren Buffett describes that in the short-run the market is a voting machine. But, in the long-run the market is a weighing machine.
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The stock market has a lot of daily variance and fluctuation. Think carefully.
2. Failure to diversify
One of the main mistakes that investors make is put all their eggs in the same basket. When times are lean, and such a specific area of investment gets hit hard, such investors are at risk of losing everything they invested. However, investing in different marketplaces and expanding one’s portfolio is important because once one segment of the market is affected then they can fall back on the other for a lifeline.
Steve Forbes, millionaire chair and editor-in-chief of business magazine Forbes, says that “In investing, you should diversify. Don’t try to hit homeruns. It’s like tennis. Unless you’re a pro, just try to get the ball over the net. Let compound interest do the rest.”
“If you don’t have the time to do your own investing, you should have someone else “babysit” the money through mutual funds.”
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3. Basing investment decisions on past performances
Special times require special action, and actions taken for volatile times should match the prevailing circumstances. Therefore, making decisions based on past experiences and especially ones that happened at a time when a certain situation was yet to be experienced might spell a great downturn in fortune.
When investing, it is proper to identify changes that are happening in the market driven by the volatile times and changing tact in approach of a business venture. This helps business ventures remain relevant even as trends change.
4. Not setting aside enough funds as emergency corpus
In volatile times, investment is inarguably a bigger risk than in normal times. As such, it is important for everyone wishing to invest to understand that they’re putting a lot of money into a venture that has overwhelming chances of not being a success. This creates need to set aside a fund that can help bail out a failed venture.
One of the biggest mistakes that an investor can make is failing to set aside money that could help them out in the case everything else fails. A good investment takes into serious account the element of risk and money gets set aside to cover for any disparities.
5. Risking money you cannot afford to lose
This is investing in a venture using money that should have been directed for more urgent, or basic, needs and which if lost would mean total decimation.
Remember that investment is greatly a risk and thus if the money that’s been put into a venture is money that the investor cannot afford to lose, then it is an unwise decision to even think about the investment. In a way, investment works like gambling where the end results cannot be easily determined and trends in the market could change overnight and affect the final outcome.
It is unwise to invest using borrowed money if paying back is going to be a hurdle.
6. Failure to conduct due diligence before investing
This will always come back to haunt an investor. Investing without first checking out if the venture that you’re putting money into is legitimate or if it has a consistent history of success (or failure) is a misstep that can lead to huge losses.
An investor should at all times ensure that they have done due diligence and conducted a background check to ensure that where they’re putting their money, chances of failure are less than chances of success.
In recent times, a lot of people have lost their money to cons who masquerade as business people capable of growing the investors’ money to considerable amounts only to vanish and leave the investors with an egg on their faces. During volatile times, the least anyone could wish for is to lose money. Doing due diligence, therefore, is of utmost importance.
7. Expecting vast returns too soon
Investment is mostly for the medium to long-term and therefore patience is key. Investors should put their money into a venture while well aware the benefits do not trickle in overnight. An investor is highly unlikely to make a sudden windfall as a return from a relatively small amount invested. The expectations should be realistic and most advisably long-term.
According to financial adviser Suzy Orman, It is better to have 50 per cent of something than 100 per cent of nothing.
The biggest mistake people make in investing is they get greedy. They begin chasing impossible returns, hoping to sell their investment to a greater fool.