Investing takes time, money, and knowledge. And as much as we don’t want to, mistakes are part of the investing process.
In this post, we will be sharing the six of the biggest investment mistakes you should avoid. Learn from these, be patient and watch your investments grow.
1. Investing without a goal
One of the very first steps you should do before you even start investing is to have clear and defined financial goals. Investing without a goal is something we don’t recommend because goals help you determine the best strategy to use.
What are you trying to achieve with your investment? Is it for your children’s education? Your own house? Your retirement?
Whatever your goals might be, there are mutual funds to help meet them. For example, retirement is a major milestone that has a long-term investment horizon. The most suited mutual fund category to achieve this goal is equity fund and/or index fund which are well-diversified funds focused on long-term growth.
Saving for a dream vacation is considered short-term. To maximize your money and help it earn more than the typical savings accounts, you may want to invest it in a money market fund like Save and Learn Money Market Fund.
Investing goals are important to provide you with direction and motivation as you progress in the journey towards financial freedom. Make sure you have specific, measurable, attainable, relevant and time-bound goals before you invest.
2. Investing without learning your risk appetite
One of the investment mistakes people make is investing without learning first what their risk appetite is.
Risk appetite refers to the level of risk you are prepared to accept. By defining your risk appetite, you can arrive with a mutual fund that suits you best. Your risk appetite also help you determine what of investor you are.
There three different types of investors:
Conservative Investor - low risk tolerance, lean more on portfolios with steady growth.
Moderate Investor - mid risk tolerance, willing to accept modest risks to seek higher long-term returns.
Aggressive investor - higher risk tolerance, want higher return through long term investing.
3. Investing without doing proper due diligence
Due diligence is an important step every investor should take to avoid getting into wrong investment vehicles. Due diligence is doing a thorough investigation on the potential investment before investing. Doing proper due diligence will help you gain essential information about the company and/or the investment and make sure you are only transacting with a legal entity.
Do not just follow the crowd. Make sure that you invest in what you know. Always conduct proper due diligence so you won’t be a victim of investment scams. In this video that we released under our FAMillenial Series, we shared tips which will help you avoid investment scams. Do watch this video so you can protect yourself against scammers.
4. Investing in over-promising returns
We get it, returns can be very enticing especially if you are a beginner and you don’t know much about investing.
However, overpromising returns that are not backed by data and tagged as guaranteed are a big NO-NO! There is no such thing as 30% monthly return guaranteed.
Remember that investing is a not a get-rich-quick scheme. There are certain degrees of risks each investment vehicle holds. Make sure you watch our video on how to avoid scams.
5. Investing without diversifying
Zeroing on one investment vehicle is not helpful. Learn to diversify your investments among different types and/or sectors.
Diversification is the process of allocating your investable money among various financial instruments, industries, and other categories. Diversification is a risk management technique which aims for investors to mitigate rusk and reduce volatility of an asset’s price movements.
How diversification works?
For example, let’s say you are already invested in bonds like the Save and Learn Fixed Income Fund which holds mainly government securities, commercial paper, corporate bonds, promissory notes and other debt instruments of varying tenor. A good diversification strategy is to invest as well in equities like Save and Learn Equity Fund. Equities invest in selected stocks and equity securities typical portfolio mix involves shares on properties, holding companies, transportation, telecommunication and power.
By doing this technique, you can take advantage of the steady capital appreciation of bonds while maximizing the possibility of long-term growth with the equity market.
Do note that diversification does not eliminate completely the risks involved in investing. You can only reduce it. Find a good balance between risk and return.
6. Investing too late
According to a famous Chinese proverb, “The best time to plant a tree was 20 years ago, the second best time is now.” This quote holds true when it comes to investing.
Here’s a quick graphical representation of how investing early can make a difference.
Both started with the same among of Php 5000 but because the person at age 25 started five years early, his returns prevail greatly. One of the biggest mistakes you may be making when it comes to building your financial wealth is investing too late.
The truth is - waiting for the right time to invest will cost you more!
In conclusion, Filipinos are now more interested than ever to overhaul their finances by investing. Take note of the above rookie mistakes which you can easily avoid. Remember, instead of letting the fear stop you from investing, you can actually jump in with the assistance of a fund manager you can trust.