Tuesday, August 26, 2008

10 most common investment mistakes

No.1 Investing at the peak of an economic cycle
It is always easier to invest when everything is rosy, when confidence is high and when your friends tell that they are making money. Worse of all, when you join in the fray, the bubble burst, so what do you do? You decide to stay out and let the investment value ride backup to recoup your capital. The problem is if you invest at the peak of cycle, it maybe another 5 years before you could see the peak again.

No.2 Taking advise from an ‘accurate source’
Most investment losses can be attributed to following third party “hot tips” and advice without doing homework. Some even claim they had insider information of that the news came from the horse’s mouth. It is sounds too good to be true, it is usually not true

No.3 Afraid to value cost when returns are negative
Value cost averaging is one strategy to average your cost and lower your investment’s breakeven point. For this strategy, you must have enough capital to value cost. You will give your investment vehicle enough time to come back up again, and most importantly, your investment vehicle must have the capability to rise in value eventually.

No. 4 Unaware of the status of investments
Many investors know exactly when their fixed deposits are maturing but have no idea when it comes to their more volatile and growth-oriented investment. Investment must be tracked more regularly than fixed income vehicles knowing their value and how they have performed over time helps you to seize opportunities to sell or accumulate more for value averaging purpose. However, do not monitor too frequently as it can cause you to panic and sell your winners too soon

No.5 Not having a required rate of return
Investors do not often set a target of return for their investment. Even if they do, they shift their targets as greed sets in, especially in bullish market. This can be dangerous as sudden event in the market can wipe out profits. What one needs to do in a bullish market is to sell the profits when the desired rate of return is met and continue to monitor the capital for further market upsides. However, if you are new or conservative investor, it is better to realize your capital and profit once your target rate of return is met.

No.6 Not Rebalancing Portfolios (switching)
During the 2003 war of Iraq, an investor announce that his investment planner had told him to switch his equity portfolios to bond as the war could be a potential danger to his equities. I met the same investor again at the end of year 2003, he said he had lost about 15% in his bond investment in the 2003 bond market crash

Unfortunately for him, rebalancing portfolio was done a single isolated event. He had forgotten that rebalancing must be done consistently in different cycles under which specific investments are exposed to. It is a good practice to rebalance the portfolios at the most twice a year, unless a sudden expected event occur

No.7 Focus on popular investment
Investors feel comfortable when they had invested in highly published. Some of these are good investments and are worth looking into but do your homework. Check if they suit your investment goals and time frame

No. 8 Focusing on guaranteed investment?
Having your capital guaranteed but you need to realize what they are guaranteeing, capital or returns? This promise of “capital guarantee” usually devices in our understanding of balancing the cost of other investment opportunities during the holding period against the security of not losing our capital at the end of tenure. Putting money into capital guaranteed fund is only suitable if you do not need the funds within the holding period and you have a diversified investment portfolio

No. 9 Not having an investment philosophy
It is just a simple statement of your style and taste. What allocations you have set, which type of risk you want to adopt and the time frame you have set to seek return in your investment portfolio. Having an investment philosophy will prevent you being overly greedy or overly fearful

No. 10 Transactional type of investment
For most of us, the only purpose of investment is to make the money. After that, what is the next, Your investment must be purpose driven, for example, to clear debts, funds a comfortable retirement or send the kids to college. Remember, greed, short term return is not a purpose

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