Investing can be extremely lucrative, but it can also be incredibly risky for many. Before entering the stock market, buying assets, or investing in a startup, it’s important to be aware of the mistakes that others have made in the past.
This is a list of the some of the main reasons investors fail:
1. Lack of diversification
“Don’t put all your eggs in one basket”. I’m sure you’ve heard that saying multiple times. It carries a lot of truth. When you begin investing one of the most important principles to follow is diversification. Lack of diversification puts your capital at risk because the performance of your investment is tied to one particular asset class or security. Studies and mathematical models have shown that stock market investors with a well-diversified portfolio of twenty-five to thirty stocks get the most cost-effective level of risk reduction.
Let’s assume someone invests their life savings of $200,000 in a fictitious publicly traded company called XYZ with shares trading for $100 at the time. The investor looked at the financials, everything seemed solid. However, a month later unexpected tariffs of 50% were slapped onto XYZ’z goods in its biggest market. A year later, a new competitor entered the market, producing superior, cheaper products with a better profit margin. By the end of the year XYZ shares trade at $50 and the value of the investor’s portfolio halved.
2. Not investing for the long-term
Making an investment shouldn’t be seen as a quick money-making opportunity. Timing the market can work, but as pointed out by The Motley Fool, “long-term compounding gains achieved through share price appreciation and dividends will outpace the nominal gains achieved through day-trading and short-term holds.”
Warren Buffet one said: “If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes.”
3. Not studying what they are investing in
This may seem obvious. But it’s crucial to have a good grasp of what an investment’s performance will be dependent on, the factors that can influence price swings. There are plenty of ways you can research more about what you are investing in. If it is a stock, look at the company’s financials, corporate culture, mission and future plans. Stay in the loop, be informed, and you won’t fall behind on developments that can affect your portfolio.
4. Following the hype
There will be assets and securities that will make headlines because of their price spike over a period. Take cryptocurrency, Bitcoin rose to as high as $17,900 in December 2017, and many people blindly started buying the digital currency with credit because of heightened media attention and word-of-mouth. Bitcoin’s price dropped below $7,000 just a few months later. Following the hype when making an investment isn’t a sound or well-thought out strategy and is just a knee-jerk reaction, not a devised plan.
5. Believing everything they hear
There will be opportunities that just sound too good to be true. Sometimes this is exactly what they are, too good to be true. It goes without saying that investing in scams should be avoided at all costs. However, identifying what are scams and what aren’t can make or break your portfolio.
Some indicators of an investment scam include:
- an opportunity with no risk or low risk.
- ‘high return’ schemes
- telling you that you need to make a quick decision or you’ll miss out on the deal
- claiming to have “inside information”