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Esther.Dumbiri

10 Simple Ways To Avoid Common Investing Problems (Part 1)

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Investing and getting returns from one’s investments could be fun until one makes a very dear mistake which could spoil all the fun.

Investing comes with its own problems but it is also not as difficult as we think.

While there are a number of ‘ground’ rules for investing, here are 10 simple nuggets that would help in avoiding common investing problems especially if you are not employing the services of a mutual fund manager or advisor.

 

1. Investing in Something You Don't Understand

It’s baffling how one would throw funds into a project without knowing how it works. Even one of the world's most successful investors, Warren Buffett, cautions against it.

It is quite unhealthy to invest in businesses you don't understand. In fact, you should not be buying stock in companies if you don't understand the business models of the company and how it achieves its aim.

It is highly advisable to make sure you thoroughly understand the company or companies before you invest - If you do, invest in individual stocks or better still, mutual funds can come handy. Even at that, seek to understand where your money is going and why. After all, it is your money!

 

2. Failing to Diversify

Please, do not put all your eggs in one basket. How? Stick to the principal of diversification - spread their risk over a number of companies so that if one particular company, sector, industry or even country (depending on your financial weight) hits a rough patch, other investment holdings may pick up the slack.

In your investments, kindly remember to allocate funds to all major spaces and allocate to all major sectors. If you do, you may have saved yourself from a total loss which may or may not occur but you never can tell.

The best widely known investors own shares in lots of different public companies.

 

3. Letting Your Emotions Rule the Process

Perhaps the major killer of investment return – in our part of the world, is emotions. It comes in two ways

A – Investing based on relationship – in local parlance, ‘na my brother’.

In this part of the world, it’s usually a taboo to say ‘no’ to a dear friend, or family. This emotion beclouds sound judgement and one ignores the red flags only to regret later.

B – Investing based on Fear and greed. Do not let fear or greed overtake you. Just focus on the bigger picture and the hard facts. Be sure you are not driven by fear of losing out or losing all. Also, be sure it’s not greed because large returns would often burst after a while. Pull out when it’s time to rather than staying put fostered on by greed.

 

4. Copy-cat investing

While some investors are trailblazers and do their own research, many attempt to mimic the portfolios of such well-known stock market successes with the hope of being able to cash in on their world-class returns. ERROR!

Copying another portfolio, particularly an institutional investor's portfolio, can actually be quite dangerous.

Why? You can’t wield much influence in the industry like the big gun. You most likely don’t have as much money as he does. Do you have inside information or the information he has? Do you even know his purpose in making such move or how long he intends to keep his funds there?

My dear, do your own ‘homework’. (Read Real Money; 2005, by Jim Cramer).

 

5. Too Much Investment Turnover

Turnover, or jumping in and out of portfolios is another return killer. Allow your seed some gestation period in order to have real benefits.

You may be missing out on the long-term gains of good investments if you keep coming and going. Don’t be an investment ‘Abiku’.

To be continued…

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It is really a nice proverb in the busniess world that never put all money on a single place. The investment markets are highly diverse where you have the opportunity to choose different assets. So, always try to take advantage of the diversity than investing in a single asset. Thanks!

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