Thinking about investing? Already dabbling in a bit of property investment, or a few parcels of shares? No matter what you choose to invest in, growing your wealth is a skill that takes some practice. And, just like lots of other skills, you may end up making a few mistakes before you get your technique down pat.
The good news is other people have made most of those mistakes for you. And if you’re careful, you can avoid repeating their mistakes. Here are three of the most common mistakes that newbie investors make, plus a few tips for avoiding the same pitfalls.
1. Trying to guess peaks and troughs
Lots of smart people have come up with theories about how you can tell whether the market is about to peak or crash. None of these theories have been widely accepted.
Think about it: have any of the famous investors you’ve read about made their money overnight? The answer is probably ‘no’; investing in shares or property is usually a long term thing – at least 5 to 7 years, but often more than a decade. That’s how long it takes to ride out peaks and troughs and make sure you end up on top in the long run.
Take the ASX, for example. Over the year up to the end of December, the ASX200 gained just over 10%. But over five years, it gained just over 35%. Since the index was properly established (less than two decades ago) it’s gone up over 80%. And that’s not counting compounding, or dividend income.
2. Getting emotional
Often times the investments that are the most reliable, or offer the best returns, aren’t particularly exciting. They might even be things you don’t agree with, or wouldn’t buy yourself. For example, it might sound cool to have a property of beachside or CBD luxury apartments, but you might get better rent and more capital growth by looking outside glamorous areas and being a bit more strategic.
3. Not understanding what they’re investing in
Part of the reason that people fall for investment scams is that they’re taken in by smoke and mirrors. They listen to a salesperson’s pitch, full of over-the-top percentage returns and emotive sales language about ‘freedom’ and ‘giving your family what they deserve’. Even when an investment is technically legitimate, investors are often disappointed by their returns or flat-out angry when they find out how their money is really being used.
Learning as much as you can before giving someone your money is critical. For example, if you’re thinking of investing in shares or in a private company, your first step should be to understand what it is they do. Read as much as you can – independent product/service reviews, prospectus documents, as many past annual reports as you can get your hands on. Make notes about the product or service the company offers, the nature of the industry they’re in, and what makes this company special compared to similar operators. It sounds like a lot of effort, but a few hours of your time could save you a lot of heartache.
This article contains information or advice that is intended to be general in nature and which was prepared without taking into account your personal objectives, financial situation or needs. Because of that, before acting on any information or advice in this article, please consider whether it is appropriate to your personal circumstances, talk to a financial planner and consider the relevant member guide, available at www.tasplan.com.au or by calling 1800 005 166, before making a decision about whether to acquire the products.