Investing is a serious game, and requires your full attention to avoid making avoidable mistakes.
When I was young, I was a curious kid always looking for adventures and doing everything I was not supposed to., particularly fighting authority – mainly the help. Home Alone sequel being the greatest influence on my childhood and being a firstborn of boys you can imagine the hell that would reign in that home when mum and dad were not home. So naturally, there were some experiments that my brothers and I conducted that taught me a few things about life. The first being, that you should never stick sharp objects in the socket and the second being that, it’s always better to learn from others mistakes rather than your own – listen to your elders. It spares you a lot of time, loss and aches.
I bring this up because both these lessons are important to remember when trying to decide how to invest in the three paths of wealth accumulation. The fact is that when it comes to investing we all act like kids trying to figure out what would happen if we stick sharp objects in sockets. Where ultimately, we experiment ignorantly and wind up making some horrendous mistakes that send us reeling across the room in financial shock.
I hope that as we study other peoples mistakes, including mine – you will be able to avoid the painful experience of having to learn these lessons on your own.
Overlooking Your “Big Picture”
Not planning, not having goals and not being organized. The oldest tale told but most of us would rather indulge in some mental accounting on your state of things. However, in order to become a successful investor, we first must have our values and goals written down on paper in clear terms and have your finances organized. It is imperative to know clearly where you currently stand, where you want to be and establishing what you need to do to get there. Only then can you intelligently evaluate the opportunities around you and figure out what might make sense for you.
So it is necessary for your investment plan to find out what you are trying to accomplish, what risks are relevant to you and how much can you handle, set parameters to measure your success, what percentage of you total portfolio will you allocate to the various asset classes and finally, address the question of diversification.
Not Taking Debt Seriously
I have met people who live on so much debt that even their income has no effect on how much debt they have. They spend so much money on month to month and borrowing to cover debt immediate outstanding debt. They are miserable, anxious, unable attain any goals and even have broken marriages as debt hangs over your head like a dark cloud that strikes lightning and hail at the end of the month.
So my advice to you is:
♣ Don’t wait to find out about your credit score/record/rating.
♣ Pay all your debts on time or sooner if it helps.
♣ Always try to negotiate for better deals that will help you clear up your debt sooner.
Putting All Your Eggs in One Basket
Or putting too many eggs in one basket is one of the biggest mistake most investors make. When building an investment portfolio it is imperative to have a diversified investment as there is no single investment that is perfect or risk-free. Therefore, when looking out to invest ensure that your investments compliment each other and when bundled up together reduce overall risk, cushioning downturns in investments and also softening the spikes as well.
I have a friend who invested all he had in the Safaricom stocks, thinking that the share price will shoot-up upon listing and he would make a killing on sale. Only later to realize that the stock would not perform as he had expected and he had to wait. However, his greatest problem was that he let pride get the best of him and he bought, even more, shares of the same stock since it was much cheaper. Remember at the time, Safaricom was and still is a great company with great future prospects and it is important to note that, sometimes the price of company shares has really nothing to do with the future prospects of a company. With that said, had he assessed his investment goals clearly he would not have invested in a stock like Safaricom that is best suited for long-term investors.
So what does diversification mean? It means that you should have exposure to a wide array of investments ranging from bonds, shares, commodities, properties – across various sectors/business industries and even different parts of the world. To achieve this, you should not have more than 10% in one fund and hold between 10-20 funds.
Waiting to Save for Retirement
People usually put off saving for retirement until later, perhaps thinking that they will have more money or maybe until their financial obligations decrease. In all honesty, can you predict the day and time you will have more than enough to save for retirement or when your financial obligations decrease or seem to stay the same in the face income increase. Hardly, ever happens. The problem is not complicated, the longer you wait to get started, the more you need to save for retirement.
Let’s take a hypothetical case for a moment to assess the benefits of being an early bird – assume we have, Jane and John. Jane decides to start saving KES 20,000 a year at age 19 and John starts saving the same amount at age 27 when he finally has a great paying job.
If Jane stops saving at age 26 for various reasons – maybe she gets married and kids come along quickly making her a stay at home mum, at an annual return of just 10% per year, she will manage to accumulate KES 10,351,480 by the time she is 65. On the other hand, John saves continuously KES 20,000 until he is 65 but in contrast to Jane he only manages to accumulate KES 8,831,850.
It is clear that Jane manages to accumulate much more over time by saving only KES 20,000 for eight years and surpassing Johns investment with a significant difference of KES 2,139,630.
Jane has only invested a fifth of the amount but has 25% more to show for it. Your take home here is that the sooner you start saving for retirement, the sooner you will be able to achieve financial freedom and go play hard!
Speculating & Trying to ‘Time the Market’
Leave this to the speculators as its a sure way of getting inferior returns because over the long-term does anyone really beat the market when the market behaves like a casino. Everything is about choice and risk but true investing relies on investing on regular intervals in both rising and falling markets, to a thoroughly researched and diversified portfolio of basket securities which are given a chance to perform over years, not minutes with regular adjustments and monitoring.
So how long should you keep a stock? Market Champions like Warren Buffet say that “only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”. So unless the company is facing obsolescence or a situation it cannot recover from, then you can consider holding a bit longer.
So what are the common ways to speculate – avoid them!
♣ Investing in non-profitable stock or stocks that everyone believes will make a lot of money – also known as ‘hot stock’. Don’t be caught up in the frenzy, it is always wise to invest in profitable companies.
♣ Putting more money into an investment that has suffered a drop in price in an attempt to buy a stock at a so-called ‘bargain’ or even try to dilute your initial investment.
♣ Actively trading your account in an attempt to make quick gains within the shortest time – similar to betting and gambling.
♣ Speculating on the future price of a given stock, commodity or currency – without sufficient research and information to grapple the complexities of options trading, to bet on price and date, your option could expire worthlessly.
Failing to Re-balance Your Portfolio
Two aspects jump out here – re-balancing your diversified portfolio and allocation. Read More here on asset allocation. It is important to re-balance your portfolio regularly because your assets keep growing over time but not at the same rate. Some are growing more rapidly than others and maintaining the balance is important in order to keep the portfolio diversified at all times and preventing concentration of wealth in some areas over others.
It takes a different kind of investor to reward losers, an intelligent and extremely focused one at that. As it is hard, but works because it ensures that you sell high, and buy low which beats the investors snare of buy-high-sell-low in an attempt the chase performance.
Chasing Performance and Investing In the Short-Term
Most investors are seeking to invest in the short-term chasing the illusion of getting rich quick schemes. I have always believed that the quickest get rich quick scheme is starting your own business – no other. Otherwise, if you looking for big wins by betting you money on gut feelings, try Sports-Pesa or some other betting/gambling game out there but, don’t gamble your future away with short-term shaky investments.
In 2014, I invested someone money in a stock that I had monitored the previous year and based on that 52-week performance, I decided to place some money into that stock. I thought I could make some quick money in the short-term but I lost. A lot. So, I sold it off at a loss and I bought a more promising stock. I am glad I did because I recovered my loss and even made more. Through this experience, I learned to be patient. Very patient.
Patients pays and as an individual investor when you pad your investment portfolio with rational investment strategies that you comfortable with, take pride and in the long-run, your investment decisions will grow and reflect the soundness of your decisions.
Underestimating Your Abilities
Some investors tend to believe that they cannot excel in investing as it is only for professionals or sophisticated investors. That is not true at all, as most professionals money managers underperform the general market. It only takes learning and research to equip yourself to develop and manage your own portfolio of investments and be profitable. The only thing you need to stick to is to be rational and adopt some common sense when going about it.
Some years back, I embarked to understand the currency market, so I opened a foreign currency trading account, top it with money and started trading. Concurrently, I was attending an investments class and the semester assignment was trading virtually in the Kenyan stock market and a way of learning. So by day, I was trading virtually locally and by night when the market was most active, I was trading in currency. It was a thrilling experience. I lost some money and gained some as well, but overall I most importantly I gained the knowledge to do it all on my own.
I am not asking you to follow my direction, but I am hoping that you will take the time to develop your own investment strategies and if you don’t have the time, get a money manager to manage your money. At the end of the day, only you can keep your best interest at heart, not some money manager looking to make commissions.
Throwing in the Towel
If you have ever put all you had in an investment and then it tanked or even been a victim of the pyramid schemes in the earlier years of 2007, do not give up. Realize that sometimes, the problem is not the market, the problem is with your inexperience with investing. I have lost much too and so I decided to become a smarter investor and to do it right each time. So for me, going back to school to equip myself with the knowledge to make me a better investor is and will always be the best decision I have ever made in my life.
In the words of Warren Buffet, “Never invest in a business you cannot understand,” or simply, if you don’t understand it, don’t bet on it! So when something is too good to be true, I always try to find out what it is all about and then decide calmly and rationally to invest or not to invest. Realize you are not alone, take the example the 26,000 victims of the pyramid scheme – people will always make financial mistakes, get bad advice, meet bad people who will rob them blind and then give up on their dream of financial security, don’t let that happen to you! The show isn’t over until it is.
By reading this, you know more than most people about how to avoid the pitfalls of investing. Although there is much more out there, by reading this you can avoid the most common mistakes people make putting you in a better place than you were before. However, I believe that the greatest mistake you can make is not being an investor in the first place.
So don’t Give up, Happy Investing!
You can click on the following links to read more about kids and money:
- 9 Simple Lessons to Help Your Children Appreciate Money
- 5 Signs It’s Time to Start Teaching Your Kids About Money
