We invest with the aim of gaining returns from our various investments. By default, our best investments are those that give us the best returns. As investors seek to maximize returns, they are bound to make mistakes, which may lead to loss of their investments. Let us look at 6 common investment mistakes you need to avoid.
- Saving to invest
A lot of people will maintain a savings account with an aim to accumulate funds to a ‘substantial amount’, which is enough to invest. The risk with this approach is that money lying idle in an account will always get an emergency to fund. With the availability of investment options that require as little as a thousand shillings’ contribution per month, investing should not be hindered by the lack of a big sum. Investing should have the same priority as saving, with whatever little income that one has.
- Investing without a plan
As one invests they should ensure they have a well laid out plan, informed by
(i) Amount of finances available to invest. Some investment options require more capital than others,
(ii) Time horizon they are willing to invest for. If one is looking for short term investments, then they are likely to consider options such as stocks and Treasury bills which can be liquidated quickly. Long term investors would consider investments such as real estate, and
(iii) Expected returns from their investments. The investments that offer higher returns are more often riskier than those with lower returns.
An investor looking to reap higher returns should also take note of the risk involved. Planning enlightens you on your financial standing to adequately inform viable investment options you can consider and the risk involved while investing. For proper planning, consult your accountant and Financial Advisor to help you evaluate your investment options.
- Investing without understanding investment fees
Do not commit to an investment without fully understanding the investment fees involved. Inquire on the rationale behind the trade commissions charged when you trade stocks; management or advisory fees for assets under management, or brokerage account fees for access to trading platforms. This enables you to make an informed decision, having considered all important aspects that could affect your investment returns.
- Committing all your investment to one portfolio
As the saying goes, don’t put all your eggs in one basket. Having all of one’s investment in one sector or investment option is risky. Diversifying your investment portfolio reduces overall investment risk while maintaining investment returns as it reduces the likelihood of all investments being exposed to the same market factors at the same time. For example, whenever the stock market portfolio is not performing well, you could always rely on returns from real estate investments. It is advisable to diversify one’s portfolio based on
(i) Horizon of investment, have both long and short-term investments in your portfolio,
(ii) Sector, especially for investments in the stock market, if possible consider buying into companies from different sectors, and
(iii) Risk, even as you aim for high returns, ensure that your portfolio exposes you to manageable risk levels. Have high, low and medium risk investments in your portfolio.
- Limiting yourself to short term investments
Whereas short term investments are ideal for risk averse investors, an investment is most productive as a long term option. This is because companies get enough time to generate value for your money and therefore provide you with higher returns. A person that commits to a 12-month investment will get higher returns than another who commits the same amount of money for a 6-month period.
- Relying on investment speculation
It is important to conduct research into available investment options or seek advice from your Financial Advisor before committing your finances. Avoid feeding on investment tips for quick returns that are peddled on financial media. There are no secret formulas to genuine investments or high-level stock trading advice. Walk the straight path of investment and have a legal fall back plan when the worst happens.