19 Dec 2018
Whatever your age, if you’re thinking of dabbling in investments like shares, managed funds or cryptocurrencies, here are a few things to steer clear of.
You might be looking to invest your money in something (whether it be shares, manage funds or cryptocurrencies, such as bitcoin) for a variety of reasons.
You may have money in savings and property, and want to diversify, or you might simply be looking to invest in something affordable, should investing in things like real estate be a bit out of your reach.
If your goal is to get rich quick (wouldn’t that be nice), spoiler alert – that’s probably not going to happen, as more often than not things like time in the market, compound interest and avoiding unnecessary risk will be the keys to success (I know, sorry to burst your bubble).
Meanwhile, if you are very close to dipping your toe in the water, here’s a list of common mistakes newbie investors tend to make which are generally worth steering clear of.
Investment mistakes beginners make
1. They fail to plan
When looking to invest, it’s generally wise to think about:
- your current position and how much you can realistically afford to invest (consider what other financial priorities you have or existing debts you may be paying off?)
- your goals and when you want to achieve them
- implications for the short/medium and long term
- whether you understand what you’re actually investing in
- whether you know how to track performance and make adjustments
- if you want to invest yourself, or with the help of a broker or adviser.
2. They don’t know their risk tolerance
As a general rule, investments that carry more risk are better suited to long-term timeframes, as investment performance can change rapidly and unpredictably. However, being too conservative with your investments may make it harder for you to reach your financial goals.
- Low-risk (or conservative) investment options tend to have lower returns over the long term but can be less likely to lose you money if markets perform badly.
- Medium-risk (or balanced) investment options tend to contain a mix of both low and high-risk assets. These options could be suitable for someone who wants to see their investments grow over time but is still wary of risk.
- High-growth (or aggressive) investment options tend to provide higher returns over the long term but can experience significant losses during market downturns. These types of investments are generally better suited to investors with longer term horizons who can wait out volatile economic cycles.
Try our ‘What style of investor am I?’ tool to help understand what level of risk you might be comfortable with.
3. They think investment returns are always guaranteed
The idea of guaranteed returns sounds wonderful, but the truth when it comes to investing is returns are generally not guaranteed.
There are risks attached to investing, which means while you could make money, you might break even, or even lose money should your investments decrease in value.
On top of that, liquidity, which refers to how quickly your assets can be converted into cash, may be an issue. Depending on what type of investment you hold or what may happen in markets at any point in time, you mightn’t be able to cash in certain investments when you need to.
4. They put all their eggs in one basket
Investment diversification can be achieved by investing in a mix of:
- asset classes (cash, fixed interest, bonds, property and shares)
- industries (e.g. finance, mining, health care)
- markets (e.g. Australia, Asia, the United States).
The reason diversifying may be a good thing is it could help you to level out volatility and risk, as you may be less exposed to a single financial event.
5. They believe the opinions of every Tom, Dick and Harry
Changing your strategy on the basis of market news may or may not be a good idea. After all, people have made all sorts of market predictions over the years, all of which haven’t necessarily come true.
On top of that, we all have that one friend that likes to pretend they’re a property, share or general investment guru, who while may come across as persuasive in their market commentary, does not have the qualifications to be giving people advice.
With that in mind, if you’re looking for guidance, you’re probably better off consulting your financial adviser who may be able to give you a more well-rounded picture of the current climate and the potential advantages and disadvantages you should be across.
6. They make rash decisions based on fear or excitement
Many investors get caught up in media hype and or fear and buy or sell investments at the top and bottom of the market.
Like with anything in life, it is easy to get stressed and concerned about the future and act impulsively but like with other things this may not be a smart thing to do.
While there may be times when active and emotional investing could be profitable, generally a solid strategy and staying on course through market peaks and troughs will result in more positive returns.
12 Jun 2019
AMP Capital's Chief Economist, Shane Oliver, looks at his nine most important lessons from investing over the past 35 years.Read more
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