5 Costly Investment Mistakes You Should Avoid

This was originally posted on Planner Bee.

Embarking on an investment journey is akin to navigating a maze that could lead to both lucrative returns and potential pitfalls. Every decision you make carries the weight of potential monetary gains or losses. That makes it challenging and scary for new investors to venture in.

However, the allure of high returns tempts many rookie investors to take risks, making expensive investment mistakes that could be easily avoided if they had done their homework.

In this article, we look at five of the most common pitfalls that investors encounter and provide actionable insights on how to sidestep them, empowering you to navigate the world of investing confidently.

Mistake 1: Not doing your due diligence

Before you embark on your investment journey, learning how to do due diligence is of paramount importance. Due diligence refers to the thorough research that investors do before making an investment decision. The research should include an analysis of the financial performance of the funds, market trends, industry dynamics, and risk assessment.

If you invest without doing proper due diligence, you could end up allocating funds to underperforming or high-risk assets. Scams and fraudulent schemes are also aplenty in the investment world, and you could easily fall prey to these.

Neglecting due diligence can also cause you to overlook lucrative investment opportunities, miss out on potential growth prospects and competitive advantages in the market.

If you want to make money from investment, best believe you need to put in the hard work. Begin doing your due diligence by building a strong foundation of knowledge about investing principles, financial markets, and different asset classes. Know your risk appetite, investment goals, and research on the various investment options available.

Consider seeking guidance from investment professionals, or mentors who can provide personalised advice and recommendations tailored to your investment goals and risk tolerance.

Mistake 2: Believing insider information

Why would someone share investment “intel” with you when they can keep the wins to themselves? Why do they have that piece of information? How do you know you can trust both the person who gave you the information and their source?

Believing so-called “insider” information can be detrimental to investing as it often lacks credibility and verification. Relying on unsubstantiated tips can lead you to make hasty and ill-informed decisions, which could cause huge monetary losses.

Also, trading on insider information obtained from unauthorised sources is illegal. It can be intentionally disseminated to manipulate market prices and influence investor behaviour. Engaging in insider trading can lead to severe legal consequences, including fines and criminal charges.

Doing your due diligence will help you avoid the temptations of insider news, relying your investments on research and analysis instead of unverified tips. Remember, if it sounds too good to be true, it probably is.

Read more: Avoiding Investment Scams: Red Flags To Watch Out For

Mistake 3: Timing the market

Market timing relies on accurately predicting future market movements. That is nearly impossible to do consistently. The stock market is influenced by various factors, including geopolitical events, investor sentiment, and unforeseen events. That means it is unpredictable and volatile in the short term.

Attempting to time the market often leads to emotional decision-making driven by fear, greed, or panic. Impulsive and irrational trading behaviour can result in losses. Another thing to note: frequent buying and selling of your investments to time the market can incur significant transaction costs, which will reduce your investment returns over time.

Instead of attempting to time the market, maintaining a well-balanced portfolio, staying invested through market fluctuations, and adhering to a long-term investment horizon can better increase your likelihood of achieving your financial goals over time.

Mistake 4: Emotional trading

Emotional trading is when you invest based on feelings instead of rational analysis. It can lead to impulsive decision-making where you buy or sell your investments hastily based on short-term market fluctuations and end up suffering unnecessary losses.

Traders who are overconfident or afraid of loss are also prone to emotional trading. The former group of people think they can predict and beat the market, while the latter is more sensitive to losses than gains as they cannot afford to lose their money.

Instead of succumbing to emotional trading, you can establish a well-defined investment strategy based on your financial goals, risk tolerance, and time horizon. This way, you are less affected by short-term market fluctuations and can focus on long-term trends and the underlying fundamentals of your investments.

By doing your homework, coupled with regular analysis of the markets that you are investing in, you can build a diversified portfolio of high-quality investments that align with your investment strategy, aiding you in reaching your goals.

Mistake 5: Not diversifying your portfolio

Neglecting to diversify your investment portfolio is an expensive mistake that can expose you to unnecessary risks and volatility, leading to a substantial loss.

A lack of diversification means that your portfolio is heavily concentrated in a few assets or asset classes. Concentrated portfolios may offer the potential for higher returns if the chosen investments perform well, but they also carry a higher risk of underperformance, which can result in significant losses.

Diversification helps cushion the impact of losses and allows investors to recover more quickly by spreading risk across multiple investments. If you only focus on one or two assets, you could also miss out on opportunities for growth and income in other sectors.

Based on your risk appetite, investment goals, and time horizon, allocate your capital across a myriad of asset classes, such as stocks, bonds, cash, and even gold. Within each asset class, you can also further diversify your investments across different securities or instruments.

A great way to quickly diversify your portfolio is by investing in

Exchange-Traded Funds (ETFs) or mutual funds. These funds pool investors’ money and invest them in a diversified portfolio of securities. Read up on these funds and choose those that align with your investment objectives and risk profile.

Read more: What to Look Out for When Investing in ETFs?

In conclusion…

Mistakes are common when you invest. However, these five costly mistakes can be easily avoided if you do your homework before diving into the world of investment.

Hopefully, these actionable tips will make it easier for you to start investing. If you want to talk to a financial adviser, feel free to drop us an email at [email protected] today!