They say experience is the best teacher but I think learning from other people’s mistakes is even better. Especially when your hard earned money is at stake.
A lot of people think investing is either a get rich quick scheme or just too risky but these two couldn’t be further from the truth.
In my experience, investing should be fairly boring and should not be fuelled by your emotions.
It is not a day to day activity and should not take up too much of your time.
So, why do people make mistakes in investing?
I think it primarily comes from 3 things; not setting goals, lack of proper education and our emotions.
To me, some of these inadequacies come from the way society talks about and looks at money; it’s either often over glamourised or talked about in a hush hush manner.
It’s really no wonder people are losing money either by not investing at all or investing in the wrong assets based on their emotions or what’s trending.
To be successful at investing, you will need to craft a personalised strategy tailored to your needs, goals and even wants and avoid these mistakes listed below.
6 Common Mistakes First Time Investors Make
1. Not Adopting a Long Term Mentality
Intelligent investors play the long game.
2. Failing To Build an Emergency Fund
It is important to build up an emergency fund before investing to provide a safety net in case the unexpected happens.
Without emergency funds, you may be forced to withdraw your investments prematurely, which could lead to penalties and lost potential returns.
The best way to build an emergency fund is to set aside a portion of your income each month in a high-interest savings account or other low-risk investment vehicle.
Try to save at least three to six months of living expenses to cover unforeseen events such as job loss, illness or unexpected expenses.
By having an emergency fund in place, you can invest with confidence knowing you have a financial cushion to lean on if needed.
3. Ignoring Inflation
Inflation reduces the purchasing power of money over time, which means that the same amount of money will be worth less in the future.
If the rate of inflation is higher than the rate of interest earned on savings, the real value of the money saved will decrease over time.
Ignoring inflation can lead to a situation where the amount saved is not enough to cover expenses or meet financial goals.
Therefore, it is important to consider inflation when making financial decisions, including saving and investing.
To preserve your money, it is important to invest or save in assets that offer returns above the rate of inflation, such as ETFs, stocks or real estate.
4. Know Your Risk Profile
A risk profile is an evaluation of your willingness and ability to take risks.
By understanding your risk appetite , you’re able to appropriately determine the proper investment asset that will help you meet your goals.
The higher the risk, the higher your possible returns. With this comes a higher chance of losing money too.
5. Failing To Diversify
Do not put all your eggs in one basket.
To protect yourself, you’d have to spread your money properly across the different asset classes including cash, stock, funds, REITs, etc as well as across different sectors, regions and even countries. This is called asset allocation.
This helps to minimise your losses when one type of investment underperforms.
But be warned, over diversification is a profit killer.
Over diversification cuts drastically into how much money you can make.
As you become more educated, you’ll see that there are are many opportunities out there to build wealth but the bad news is, you only have so much money to put in per time.
Don’t get greedy or over emotional and spread your moneys too thin.
If you invest £1000 across 5 assets and they make an average return of 15% per year, you make less money than when you put them in 3 assets with the same return.
Do the math!
6. Do Your Due Diligence
Doing your due diligence before investing is crucial for a number of reasons.
First, it helps you make informed investment decisions based on facts, rather than emotions or rumors. By thoroughly researching the investment opportunity, you can gain a better understanding of its potential risks and rewards, as well as any external factors that may affect its performance.
Additionally, doing your due diligence can help you avoid investment scams and fraudulent schemes. By verifying the legitimacy of the investment and the parties involved, you can protect yourself from financial loss and potential legal issues.
Conclusion
Investing does not have to be complicated or risky. By avoiding common mistakes and taking a long-term approach, you can increase your chances of success. It’s important to set clear goals, build an emergency fund, know your risk profile, diversify your investments, and do your due diligence.
Investing in your financial future is crucial, and taking the time to educate yourself is a wise investment.
If you’re looking to learn more about investing and get on the right track, I invite you to register for one of my investing workshop.
Together, we can create a personalized strategy that works for you and helps you reach your financial goals.
