Six investing mistakes you will want to avoid
It’s a new financial year and a time when a lot of us decide we are going to “financially adult” and start investing to grow our wealth and multiply our money. Bravo! Learning how to do this and putting practices in place to do so consistently throughout your life is a great step toward creating financial wellbeing. Exciting, huh?! Before you get started let me share with you the six most common investing mistakes I see people make so that you can take steps to avoid them.
Investing without a Goal
This is probably the most common investing mistake I see - investing without a goal in mind. How will you know if you’re successful if you don’t know what good looks like? Furthermore, how will you know you’re appropriately invested if you haven’t articulated your timeframe?
Start by writing down what you would like to achieve by when and how much money you need to do it. Once you have this figured out, you will be well placed to know where you should invest your money and how much you need to potentially put away on a regular basis to get you there. You can use this template to help guide you through.
When I finished university and began working in my first full time job I knew that I wanted to build up a deposit to buy a home. I knew that I would need about $120,000 to cover my deposit, stamp and legal fees for the deposit. So that was my goal. Based on my salary and living expenses at the time, it was going to take me between 6-8 years of consistent saving and investing to do this.
So I knew how much I needed to save and had a reasonable timeframe of how long it would take me. From there, and with help of a financial advisor, I was able to work out what kind of investment would safely give me the average returns I wanted to generate in order to achieve my goal.
So the primary benefit of investing with a goal in mind is that it helps you to determine how to invest your money. The other huge benefit of investing with a goal in mind is that it helps you to stay the course when the inevitable market swings occur. It will help you to remain deliberate in your actions when others panic or get greedy.
Not learning the fundamental concepts of investing
Another common mistake. So often people say I want to get into investing and I’m thinking about buying some shares but when I dig a little deeper to ask them “why do you want to invest”, :what type of investment will help you achieve your goal” and “what’s your risk appetite” they stare at me blankly. I get it, saying you’re an investor feels very grown up and is exciting to talk about. Do you know what’s not exciting - making a bad investment and losing your money due to ignorance.The good news is there is an abundance of information and resources out there to help educate you about investing. The foundational concepts are quite simple and when applied allow you to invest safely and appropriately.
When I was first learning about investing all I had available was books but the world has moved on and now you can learn about investing through many different mediums. You can listen to podcasts, download an e-book, attend an event, an online course or simply a webinar to learn all about it. Yes the stiff suit type of investing courses and books are still out there but there’s also a new wave of educators who deliver investing education minus the jargon, mansplaining and snoozeville monotones. Some of my favourite resources for learning about money include:
1) Podcasts - Pocket Money, The Pineapple Project, and Shares for Beginners
2 ) Educational Events - Ladies Finance Club & Skilled Smart are two financial education companies founded by Australian women that you can check out.
3) Books - The Barefoot Investor, The Richest Man in Babylon, How to Unf*ck your Finances; and,
4) Online courses - you could take my Money Makeover Bootcamp (shameless plug!).
Following unsolicited advice
When it comes to investing everyone thinks they’re an expert (insert eye roll here) - especially the fellas. Yes, I’m generalising but it’s based on my lived experiences. You know what I’m talking about. It’s the uncle who spouts advice on his top stock picks over Christmas lunch or your mate who works in equity trading who knows a mining stock that’s about to skyrocket or the Uber driver who wants to tell you about his get rich quick scheme or the random that you met at party who’s tells you equity crowdfunding is a sure thing or your coworker who fancies themselves as a day trader - no, no, no and no. Sometimes they’re right but mostly they’re wrong. Confidence does not equal investing ability or expertise.
Personally, I treat any ‘hot tip’ given freely and easily with great skepticism especially when it comes from someone who isn’t a professional. If it sounds too good to be true, it probably is. The smart thing to do is your own independent research and if you’re not confident in doing that yourself work with a suitably qualified professional such as a Financial Advisor who is legally obligated to act in your best interests.
Investing whilst you still have high interest debt
High interest debt is expensive and it’s taking you financially backward fast. That’s my message in a nutshell but let me break this down for you.
According to the Vanguard Index Chart Australian Shares have returned an average of 9.7% over the past 50 years. Shares, of course, representing a high risk but high return investment asset class. The average credit card interest rate in Australia is currently about 16.03%. Why does this matter?
Let’s compare results using a simple calculation of what you could gain with an investment versus what credit card interest would cost you over the same period. If you invested $1000 in shares and earned a return of 9.7% you would earn +$97 in the first year meanwhile your $1000 in credit card debt would have cost you -$173 over the year because it compounds monthly. Net position? -$76. You’ve gone backwards.
So, this is why it’s important to prioritise paying off any high interest debt before you start investing. My personal rule of thumb, is anything over 5% interest is starting to get into the high interest rate territory. Others say anything above 10% is considered a high interest rate. Ultimately, it’s your call to make but hopefully you know understand what I mean when I say that high interest debt is taking you backwards.
Investing in something you don’t understand
I cannot tell you how many of my guy mates ridiculed me for not investing in cryptocurrencies circa 2017 but simultaneously couldn’t explain to me the fundamentals of cryptocurrency and blockchain technology. Urgh! Notice how they all went quiet in 2018? There was a point in time where I couldn’t escape this topic of conversation. Now none of them seem to want to talk about it.
The point of this story is not to comment on the merits of blockchain or cryptocurrency. The point of this story is that you shouldn’t invest in something you don’t understand. To quote Warren Buffet, ‘Don’t invest in a business you don’t understand, instead invest in a simple business that you do understand’. Pretty straight forward right? You want to know how something works to be able to decide if by investing in it you’re likely to make money or not (aka the investment risk). If you don’t understand it then don’t put your hard earned cash in it.
Concentrating your investments
You know the saying, ‘don’t put all your eggs in the one basket’? Well it applies to investing. Basically concentrating your investments to a single company or asset can be risky because you’re completely reliant on that one investment to do well. If it doesn’t do well then you will most certainly take a hit.
So how do you combat this? Through diversification of your investments. For example, rather than investing all your money in a single company (share) where the chance of that one company not performing is quite high, you invest your money in 10s or 100s of companies. The chance of those 10s of companies not performing is lower than the chance of that 1 company not performing. The chance of those 100s of companies not performing is lower again. You see what I mean? By spreading your investments across 10s, 100s or even 1000s of things you reduce the risk of losing money.
Oh, and remember the foundational concepts of investing that I talked about in point 2? Yeah - this is one of them.
So these are six of the most common investing mistakes I see. If you liked this article or have other mistakes that you want to share please drop me a comment below. Happy investing!
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