Investing is an important issue in today’s world and it is important to find a strategy which secures a safe future and allows paying all the necessary bills we can’t avoid. A savings account doesn’t satisfy to plan for a sufficient income when you reach the age of retirement and even the return is not high enough to save for purposes in the near future. The inflation is often higher than the interest rate of your savings account.
Many people started already long time ago investing to reach a high return on their money and made use of popular investments instruments like stocks, bonds, mutual funds or some other investment products. Every investor has already made some mistakes and experience will help them to take the right decisions in the future. However, investing requires always some risk; it is not necessary to avoid these risks but to recognize them and plan an investment strategy which fits you.
Here are some mistakes of investors to avoid and which may help you to reach a good return on your investments:
1. Buying one stock or insufficient diversification
You probably know the popular verb “Don’t put all your eggs in one basket”; this is important when you want to invest in stocks and even in other investment instruments. Diversification is important but it is not enough to spread your risk over a large portfolio of different stocks if they have the similar investment strategy. For example, you buy 20 stocks in the energy sector; you will limit the risk that you will lose all your money because it is unlikely all these companies will go bankrupt. It is recommended to diversify in different sectors and probably also investment instruments with lower risk.
It happens often that people are influenced by the media through advertisements, newspapers or even people who reached already a high return with the investments they recommend. It is necessary to investigate these recommendations to prevent you rush into purchases when they are overvalued or the expectations for the future are uncertain.
2. Investing without determining your risk tolerance and your investment style
Investing means always a certain risk and you need to be aware of possible losses. If you struggle to pay all your bills or you can only live with a limited loss of money during a certain period; it is preferable to search for safe investment options. Your age is also an important factor in your investment strategy. When you are near to the age of retirement you can better limit the level of your investments in shares.
Investors who don’t know their risk tolerance make often the mistake to invest all their money in stocks or mutual funds with a similar investment strategy. Defensive investors will invest most money in bonds and only a low part in stocks. Aggressive investors will likely invest at least 75% in shares and 25% in bonds. You will understand the importance of your risk tolerance and investment style to avoid investing in products which doesn’t fit your investment profile.
3. Investing without paying attention to the time horizon of your investment instrument
It is important that you know how long you don’t need your money. A mistake of many investors is that they invest in assets which require a longer time horizon than they need the money. It is a mistake to invest in the stock market if you need your money within three years or even sooner. Stocks or mutual which invest in stocks have mostly a time horizon of at least ten years. You also need to know that saving in retirement plans will only give you tax benefits until you reach the age of retirement. It is impossible to withdraw money from your retirement plan without a penalty.
4. Investing without a plan
If you invest without a certain investment plan you will likely invest in investment instruments which doesn’t fit short-time and long-time goals. Everyone needs money for unexpected expenses and for certain purchases in the near future. If you don’t plan carefully you will invest too much in investment instruments which you need sooner. It is important to know how much you need for savings and how much for long-time goals to avoid unexpected surprises.
Investing is a learning process and everyone will make wrong decisions in the beginning but with some experience you will know the right investment strategy. It is important to avoid these mistakes and this will help you to make investments which will benefit you in the short and long run. It is important to check ratios and to be sure that you don’t buy when certain assets are overvalued.
Be careful and follow the performance of your portfolio; this will help you to make the most of your investments and to build up a portfolio which fits your needs.