Money Management
November 11, 2024
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Investing is essential for long-term wealth accumulation. However, simply investing is not enough; the right investment is essential.
It is easy to make mistakes that will hinder your ability to accumulate wealth in the long run.
When making investment decisions, one must first answer fundamental questions such as what resources should be set aside to begin the journey. One must also keep the end goal in mind and, above all, choose the best investment option for a given time period.
With this in mind, it is therefore important to know and understand the common mistakes and traps that investors usually fall into, in order to be able to navigate around them successfully when needed.
Some of the 10 biggest investment mistakes to avoid are explained below;
This is very common, especially among first-time investors. To most what works for Paul will work for Peter.
They are guilty of assuming that since everyone is talking about something, and most of the people they know are getting onboard, then it automatically means that it is a worthwhile investment opportunity.
However, history has shown that trends do not necessarily lead to a successful venture. If anything, trends can be tweaked and used by con artists to lure such investors.
A good example could be the Amazon Web Worker scandal where Kenyans lost millions of their hard-earned money by simply following the wave.
When it comes to investment, thorough research and vetting is one of the non-negotiables.
Read Also: Five Reasons Why People Get Scammed – Money Psychology
When we fall sick, we head to the doctor’s office as we trust their qualifications and judgement. However, when it comes to putting our money in an investment scheme, most tend to either go in blindly or trust strangers on social media.
Most of these ‘investment experts’ on social media are just salesmen trying to meet their daily quota and you end up as the unwitting client. Some of them could also be selling hot air.
Just because they have 10k or 100k followers does not make them the ideal advisors when it comes to investing.
One could instead seek experts that are specific to their area of interest. For example, if looking to invest in the real estate industry, seek out leaders in the field. People with a proven track record when it comes to real estate investment, as opposed to ghosts behind keyboards that are blessed with the gift of gab.
Read Also: Investing for Beginners: How to Get Started
Patience is a bitter plant, but its fruit is sweet – Chinese Proverb
Most investors know that patience is one of the most important parts of the process, but it is also one of the most difficult skills to learn as an investor.
Giving your investment the time needed to mature and start providing returns may seem like a boring strategy, but it has been known to rake in good returns in the long run.
For example, for one to experience the magic of compounding, time is a necessity. In investing, compounding comes about when the returns on your investment also start delivering returns. Think of it as interest earning interest and that new interest also earning interest on itself month over month or year over year for many years.
However, getting to this point demands patience and discipline. The most successful investors both locally and globally use both in their everyday approach to investing.
Read Also: The Life-changing Magic of Compound Interest
Some will tell you that even tiny moves can lead to growth when it comes to investing, and they could be right.
It helps nurture a healthy financial habit. If you start small and slow, even with a small amount of cash, you are inadvertently cultivating a habit of investing regularly.
However, if you direct all your emergency and daily upkeep money towards an investment, that’s a gamble.
It is no different than someone going for the big lottery win. If you get it right, your life changes but on the flip side, pouring everything you have on an investment opportunity that stands a 50/50 chance of success is not smart.
Once you start investing money you’ll soon need, chances are that you'll drain your young business/investment in no time.
Maybe try setting up a separate investment fund or kitty instead, and grow it while you look into potential areas of investment.
Read Also: What is an Emergency Fund and Why You Need One
Vague goals lead to vague outcomes – Robin Sharma
Your investment objectives and goals drive your entire investment strategy, yet many don’t even set any objectives prior to investing.
This is a recipe for failure as having clear goals is a non-negotiable when it comes to investing. It is also important to know that ‘I want to be rich’ is not an objective.
‘Rich’ means different things to different people. To set a realistic objective along these lines, one needs to get into the details of what being rich/wealthy means to them and create a plan on how to get there.
For example, do you want to enjoy a comfortable lifestyle, take three holidays a year, or are you looking at creating an empire for your future generation? Once you know what you want, you can then steer your investment objectives to reach that goal.
Overall, one needs to take a step back and evaluate how their investment objectives align with their time horizons.
Your objectives need to be Specific, Measurable, Achievable, Realistic, and Time-bound (S.M.A.R.T).
Read Also: Money Mastery: How to Set & Actually Achieve Your Financial Goals
“The only man who never makes a mistake is the man who never does anything.” - Theodore Roosevelt
It goes without saying that multiple streams of income are vital when it comes to wealth creation in the long run.
Keeping all your cash in a bank account means that money loses its purchasing power due to the rising rate of inflation.
This is not to say that everyone is meant to go down the path of entrepreneurship, but there are other ways to invest your money such as money market funds or even investing in a friend’s business.
The goal is to grow wealth in the long run and this does not mean quitting your job and opening a business.
Read Also: 6 Clever Ways to Overcome Your Fears and Take More Risks in Your 30s
Find a plan that works for you and grow your money at your own pace. However, failing to invest in another potential revenue stream either due to some comfort derived from employment or simply fear could potentially lead to regret.
A good question to ask is - What happens if my current source of income stops abruptly? That should be reason enough to look into investment opportunities.
Read Also: What to Do If You Lose Your Income Mid-Career?
You have to understand what you are getting into, it’s as simple as that. Investing is an effective way of making your money work for you in order to build wealth.
Pouring your money into a venture you know little about can be likened to flushing it down the drain.
You need to understand the intricacies of the business you are getting into. For example, if looking to start a small food delivery business, you’d need to know things like, operation costs, the right suppliers and their next best alternatives in case there is a supply chain issue, the most preferred menu, what to do with leftovers, licences needed to operate, best pricing model, best marketing channels etc.
Just going into it blindly means that there is a high risk of getting stuck and failing even before the business takes off.
One, therefore, needs to carry out a detailed analysis of any investment opportunity prior to engaging and funding it.
Read Also: 9 Financial Topics You Need An Understanding Of
There is always an element of risk when it comes to investing, which then makes the option to spread your risk a viable one.
It’s the proverbial ‘putting all your eggs in one basket scenario. By spreading your investment across different assets, you are less likely to go under when an unforeseen investment wipes out one of your assets.
Diversification is simply a way of spreading risk to counter any unexpected losses. Investments can go up or down depending on the assets you chose and how the market is performing, this is a natural part of investing.
Read Also: Why You Should Diversify Your Income
The potential returns and the risks involved when it comes to investing change over time due to economic, political and regulatory developments. For example, the government could decide to ban all kinds of plastic packaging, how does this affect your food business?
Another example, Covid-19 strikes and all social gatherings are banned. This means your small pub will take a major hit. Can you adjust? Do you have a fallback plan or venture?
If you have a diversified portfolio, adjusting to such changes is easier as when one is down, the other could help keep you afloat.
Read Also: How to Go Broke in Under a Year
When emotions take the lead in any investment, logic tends to fly out of the window, thereby increasing the chances of failure.
Underestimating the risks associated with investments is one of the reasons why investors sometimes make questionable decisions made on emotions.
There are mostly two conflicting emotions that usually end up steering our investment behaviour. Fear – measured by risk, and Greed – measured by returns.
These emotions usually create an illusion of control in that we end up thinking that we have control of the market forces at play and that we are cunning enough to never experience loss.
Fear means that we are most likely going to pull the plug on any investment the moment we smell trouble. For example, Carol’s food business is going under due to Covid so we fold up and close before we get hit as hard as Carol.
However, had we managed to contain our emotions, we could have probably looked into how to adjust our small food business to go with the times e.g. home and office deliveries etc.
Greed on the other hand gives a false sense of invincibility and nothing-can-go-wrong mentality. It leads investors into ventures built on sand. Psychologists have shown that greed is what con artists target when looking to lure unsuspecting victims.
By controlling your emotions and making investment decisions on facts and hard data, you have already won as it means that you’ll be best equipped to handle any market shocks.
Read Also: How Fear, Guilt, Shame and Envy Affect Your Financial Goals
It is very important to be able to distinguish viable investment ideas and good marketing packaged as a viable opportunity.
The thin line between the two has seen many Kenyans losing their money in elaborate schemes such as shady greenhouse deals, shady land deals, and shady quail eggs phenomenon to name but a few.
On paper, they look good but if you take a few minutes to look under the hood and you’d realise that it’s all smoke and mirrors.
The opportunity to make a fortune in a short amount of time is appealing, almost irresistible. However, one needs to be stingy with their money when it comes to investing.
Digging deeper before putting your money into anything is the best practice. It may take some time and delays but it is always worth it in the end as it means that you go into any investment opportunity with both eyes open.
Always ask questions and check the answers with an unbiased source before investing. Take your time and talk to trusted friends, colleagues and family.
Read Also: Too Good to be True? Signs It’s a Get-Rich-Quick Scheme, Scam
Mistakes are part of investing. By learning from your mistakes, you become a better investor.
It is important to know that despite the countless books on investment and data that exists out there, no one can really be 100% certain as to how the market will play out.
Understanding investment risk and the level you’d be willing to stomach prior to taking the leap is one of the most important parts of the process.
Read Also: 5 Types of Risks You Should Know
This is why experts advise investors to create and maintain an emergency fund so as to be able to make it through the rainy days.
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