Mistakes to Avoid When Investing

Investing can be an exciting way to grow your money, but it's important to approach it with caution.

While there are now platforms that make investing easier and simpler, it is still a skill that requires knowledge in different areas, like understanding market trends and analyzing financial data.

In another article, I shared a simple checklist of what anyone must-have first before investing to ensure a solid foundation.

Now, our goal is to be aware of the common mistakes made when investing. Making mistakes is part of human nature. But as a precaution, what we can do is familiarize ourselves with it so we can recognize it early on or avoid it altogether.

That’s why, in this article, I’ll be covering the 5 common mistakes an investor makes and what we can do to protect our finances and make informed financial decisions.

1. Putting All Your Eggs in One Basket

When an investment is going well, it’s easy to become focused on that asset class and be tempted to put all available funds into it. While it seems attractive at first, let’s keep in mind that by NOT diversifying, we risk all funds to possible losses in case the investment does not perform well.

To avoid this, it’s crucial to spread investments across different asset classes. Overall, what we want is for a portion of our assets to generate predictable, slightly lower returns, while another portion is poised for growth, but at the cost of more ups and downs.

Diversifying helps increase your long-term growth potential, mitigates the risk, and lessens the impact of the negative performance of any particular investment.

Additionally, don’t forget to review and rebalance your portfolio on a regular basis to maintain diversification and adapt to changing market conditions.

2. Trying To Time the Market

This usually happens when investors aim to predict the “correct” timing of buying or selling investments based on short-term market fluctuations. This comes from the desire to maximize gains or avoid losses as much as possible. But by trying to do this, we can end up missing out on the best days, being paralyzed, and not making any progress at all.

What we can do is focus our strategy on our long-term goals. Take a disciplined approach by investing regularly over time using methods like dollar-cost averaging rather than following short-term market patterns. Invest in high-quality assets and hold them over time rather than making impulsive judgments based on market timing. Remember that time in the market, not timing the market, is the key to successful investment.

3. Setting Unrealistic Expectations

Investors can have overly optimistic or unreasonable expectations about the returns they can get from their investments. This can result from biases based on prior performance, a lack of knowledge of the market, or being swayed by unrealistic claims from unreliable sources.

When it comes to this, it’s essential to set feasible and achievable goals based on thorough research and analysis. Make sure to use facts and figures to identify what you can expect from your investments.

For the more stable funds that offer fixed returns, you can look at anywhere from 0.5% to 8% returns on average for the year. Meanwhile, for equities, there is a possibility of going up to 10-15% on average.

Note that the percentages shared above are on average, meaning there are years when the numbers are negative, as well as times when the numbers reach 40% to even 100% gains.

4. Letting Emotions Guide Your Decisions

As humans, our emotions can easily get the best of us. Emotions, such as fear or greed, are normal to surface when investing, but these reactions can lead to rash decisions, which can cause poor investment outcomes.

Overall, the way to overcome this challenge is to have an investment plan and stick to it. And a well thought out plan, normally covers both the possibility of markets going up and also going down.

You can also consider seeking guidance from your financial advisor, who can give you an objective viewpoint and assist you in staying on track.

5. Not Doing Any Research

Usually, skipping the research part comes from relying too much on the latest trend or on the recommendations of other people. Either the pressure or the fear of missing out can make a person dive right in without doing any research to learn more about the investment.

A good way to temper one’s excitement to invest is to remember the amount of time that you actually spent to earn that money. For instance, if it takes you 1 year of savings to generate $30,000 (or say P1,000,000)... Then it feels kind of reckless to invest all that in just an hour of research, right?

Now, as for how you know if you’ve done enough research, my advice is that at least you should be able to answer these questions:

• What is the underlying asset I’m investing in?
• Is this asset positioned to make money?
• How exactly do I earn?
• What are the risk factors that will cause me to lose money?

And one of the best measures if you really understand an investment is if you can explain it to another person, and they’ll understand too what’s going on and why you’re investing.

In conclusion, let’s remember that investing requires careful thought and well-informed decisions. By being aware of these common mistakes and taking steps to avoid them, you can increase your chances of a positive portfolio.

Keep in mind that investing means leveraging time to grow our money. Approach it with patience and discipline, as it’s a long-term commitment. Stay vigilant, educate yourself, and remain focused on your future goals.

P.S. If you have any investment or financial concerns or if you’re looking for an investment advisor to guide and assist you, don’t hesitate to book a call with me here.