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7 Things to Avoid for Newbie Investors

By: Sunder Singh
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Making intelligent financial investments is an excellent way to beat inflation and to increase your net worth at a potentially rapid rate. However, investing is not without its risks and pitfalls. As a new investor, you may have heard many stories over the years about investors who have lost their shirt through poor decisions. Likewise, you may be aware of savvy investors who have seemingly struck it rich on their smart investment decisions. While there are no guarantees that any investments will pan out, there are some pitfalls that you can learn about beforehand that could help you to decrease risk and make smarter investments. These are a few of the common pitfalls that new investors should avoid.

 

Investing Without Research

Many new investors are inspired to take action when a friend or family member gives them a great investment tip. For example, an in-law may tell you about a hot stock pick that he has turned a huge profit on, and you may be eager to mimic those results. Before you place any funds at risk through investment activities, take time to educate yourself. You should understand the type of investment vehicle that you are selecting, such as stocks or mutual funds. You also should research the potential growth expectations from this point forward using multiple sources for research.

 

Jumping in Too Quickly

The lure of turning a large investment into an even larger return may be difficult to resist, but investing a large chunk of cash into a new investment that you are unfamiliar with can potentially lead to a huge loss. A smart idea is to get your feet wet with smaller investment amounts. By doing so, you can get first-hand experience without placing as much money at risk. This is also essential if you want to maintain a balanced portfolio.

 

Using Funds You Cannot Afford to Lose

New investors often see big dollar signs when they analyze investments. They look at how much money they could make in a best-case scenario, but they fail to consider realistically how much money they could lose in a worst-case scenario. Generally, you should not invest any money that you cannot afford to lose. For example, if you need some of your cash reserves to pay your tax bill in a month or two, this money should not be used for investing.

 

Failing to Diversify

Another common mistake that new investors make is putting all of their eggs in one proverbial basket. Through diversification of assets, you spread risk across multiple types of assets. Even if the value of one asset decreases for a period of time, the increase in value from other assets may offset that loss. Each investor will have a comfort level with a different allocation of investments. For example, one investor may feel comfortable with an allocation of 25 percent in real estate and the remaining portfolio invested in stocks and bonds. Another investor may prefer to be heavily invested in low-risk bonds with some diversification in real estate and stocks. Keep in mind that the allocation selected may impact return as well as risk. Ideally, you will find a healthy balance between risk and return.

 

Trying to Do It All on Your Own

Some new investors are timid about reaching out to others for assistance and support, and other new investors may rely on inexperienced professionals or advisors. There are many resources for investors to use, and you should take full advantage of these resources. By doing so, you may make smarter investments. For example, using the services of a Brisbane buyers agent who has experience assisting real estate investors may be advantageous. This professional may help you to identify properties that may be in great markets and that could produce a steady profit for you. An alternative may be to partner with an experienced investor for your first property or two so that you can learn the ropes from someone with a proven track record.

 

Investing Emotionally

Many people have a strong emotional attachment to their money, and there is good reason for this. You may have worked hard to earn your money, and you understandably need money for sustenance, lifestyle maintenance and more. Be aware that strong emotions can cause you to make poor financial decisions. For example, if a stock price is falling, you may be inclined to cut your losses and sell prematurely. The thought of any additional loss can be emotionally unnerving. However, when you react emotionally in this way, you lock in your loss. If you had been patient and researched the situation rationally, you may have learned that this was a brief downturn and that the stock price was expected to rebound quickly.

 

Basing Decisions on Past Performance

Regardless of whether you have received investment advice from a friend or family member or you have researched an investment independently, you may be inclined to make an investment based on its past performance. Understand that past performance does not accurately predict future performance. For example, if you are preparing to invest in a rental property, you may view the previous owner’s income and expense statements. However, you may not take time to learn that the house is located in an area that had a recent military base closure and that occupancy rates and rents are falling throughout the area. Looking as past performance is wise, but you also need to determine if this performance reasonably may continue and for how long.

You can see that many factors must be reviewed and analyzed when you make each new investment. All investors will lose money from time to time, but you may decrease your losses and maximize your returns when you avoid these pitfalls and make a solid effort to make thoughtful investment decisions.

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