The top five pitfalls to avoid when investing
Friday, April 10, 2015/
Investing is a fantastic way to build your finances and generate an additional stream of income. However, when it comes to investing your money, there are many dangers to be wary of.
From my experience, there are several key mistakes that people make when investing that can jeopardise their results. Protect your investments by avoiding the following top five pitfalls.
1. Not seeking professional advice
You work hard for your money, so why gamble it away? When it comes to investing you need to talk to experts who can provide a professional opinion.
A solid investment strategy is dependent on many factors, including your personal situation and financial goals, along with a thorough understanding and assessment of the current global economic situation and key economic indicators that are crucial to forecasting future growth sectors in the economy.
A reputable, accredited financial adviser can analyse both the macroeconomics and microeconomics to asses which sectors will be outperforming and worth investing in and pick quality businesses that have a consistent track history.
Consulting a professional ensures risk is minimised, promotes capital preservation and assists you in making a more informed investment decision.
Any type of investment carries some element of risk, so it’s important to seek advice from a professional investor who understands the types of risks that can affect your investment and what to look out for.
The Australian Securities and Investments Commission conducted a study in 2014 on financial behaviours, which found 28% of people said they had heard of the risk/return trade-off but didn’t really understand it. This highlights how important it is to seek professional advice when investing.
2. Investment scams
It’s important to be wary of investment scams and remember that if it looks too good to be true, then it probably is.
Many investment scams can appear to be legitimate, making it difficult to differentiate them from genuine opportunities. Avoid potentially losing money or ending up in debt as a result of an investment scam by seeking independent financial and/or legal advice, or contacting your local office of fair trading, ASIC or the Australian Competition and Consumer Commission for assistance.
Key things to watch out for are any out of the blue unsolicited offers and get-rich quick schemes that offer guaranteed high financial rewards. In addition to losing any money you invest, if you invest in a dodgy tax scheme, you are also at risk of being held liable to pay back any missing tax, plus interest and penalties.
If someone approached you with a suspicious investment opportunity, do not agree to anything and cease communication with them.
3. Having a “set and forget” attitude towards investment
Shares can be an excellent long-term investment strategy as you can receive potential capital gains from owning an asset that can grow in value over time, along with potential income from dividends and lower tax rates on long-term capital gains.
However, timing plays a key part in getting the best results from your investment and for most people knowing when to buy or sell their shares can be a complex and confusing process.
Accurately gauging the market can be a very time-consuming process that involves keeping up to date with how the company is performing compared to similar companies and how the overall market is performing, along with regularly monitoring the share prices and industry trends. It’s important to read all relevant pieces of correspondence sent by the company, including annual reports and statements, paying particular attention to any takeovers.
4. Thinking property investment is always a lower risk option
While property investment may seem like a lower risk investment option, there are several potential pitfalls to keep in mind.
High entry and exit costs along with changes in interest rates can make property investment an expensive option for those looking to invest. According to ASIC, exclusively investing in property is a poor diversification strategy that increases your risk as you will have a lot of money riding on one small market sector.
Another factor to consider is whether your rental income will be enough to cover your mortgage payments and other related expenses and if you are in a position to cover all of the costs yourself during the times you do not have a tenant.
It’s a common assumption that property prices are always expected to increase, however this is very dependent on location, and market predictions have not always been accurate. This puts you at risk of owing more than the property is worth if the value of the property goes down.
5. Falling for the hype
When it comes to picking the right shares to invest in, it’s important to avoid any media hype surrounding a company and instead base your decision off of independent research and analysis.
Professional investors offer the benefit of experience and in-depth knowledge when choosing shares and can help steer you in the right direction. Sometimes the companies that yield the best results for shareholders may not sound the most exciting or glamorous.
Remember, that it’s in the best interest of a company that is launching its IPO to build as much media frenzy to boost its own shares. This does not necessarily provide a reflection of its position in the market or predict how successful it will be.
Michael Kodari is the founder of KOSEC – Kodari Securities.