We invest with the aim of gaining returns from our various investments. By default, our best investments are those that give us the best returns.
But as investors seek to maximise returns, they’re bound to make mistakes that may lead to a loss of investments. Here are six mistakes that are most likely to lead to this unfortunate scenario.
1. Saving to invest
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A lot of people will maintain a savings account with the aim of getting their money to accumulate into a ‘substantial amount’ that’s enough to invest.
The risk with this approach is that money lying idle in an account will always get an emergency to fund.
With the availability of investment options that require as little as a Sh1,000 contribution per month, investing shouldn’t be hindered by a lack of big cash.
Give investing the same priority as saving, and start with whatever little income you have.
2. Investing without a plan
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As you invest, you should ensure you have a well laid-out plan informed by:
(i) the amount of finances available to invest, with some investment options requiring more capital than others
(ii) the amount of time you’re willing to invest for. If you’re looking for short-term investments, then you’re likely to consider options like stocks and Treasury Bills that can be liquidated quickly. Long-term investors would consider investments like real estate
(iii) the expected returns on your investments. Investments that offer higher returns are more often riskier than those with lower returns.
An investor looking to reap high returns should also plan for the risk involved. Planning enlightens you on your financial standing, which adequately informs the viable investment options you can consider and the risk involved while investing.
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For proper planning, however, consult an accountant and financial advisor to help you evaluate your investment options.
3. Investing without understanding investment fees
Don’t commit to an investment without fully understanding the fees involved.
Inquire on the rationale behind trade commissions charged when you trade on stocks, management or advisory fees for assets under management, or brokerage account fees for access to trading platforms.
This enables you to make an informed decision, having considered all important aspects that could affect your investment returns.
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4. Committing your investment to one portfolio
As the saying goes, don’t put all your eggs in one basket. Having all your investments in one sector or investment option is risky.
Diversify your investment portfolio to reduce overall investment risk, while maintaining investment returns. This reduces the likelihood of the investments being exposed to the same market factors at the same time.
For example, when the stock-market portfolio is not performing well, you could always rely on returns from real estate investments. Diversify your portfolio based on:
(i) horizon of investment – have both long and short-term investments in your portfolio
(ii) sector – especially when it comes to investments in the stock market, if possible, consider buying into companies from different sectors
(iii) risk – even as you aim for high returns, ensure that your portfolio exposes you to manageable risk levels. Have high, medium and low-risk investments in your portfolio.
5. Limiting yourself to short-term investments
Whereas short-term investments are ideal for risk-averse investors, an investment is most productive as a long-term option.
This is because companies get enough time to generate value for your money and provide you with higher returns.
A person that commits to a 12-month investment will get higher returns than another who commits the same amount of money for a six-month period.
6. Relying on investment speculation
It’s important to conduct research into available investment options or seek advice from a financial advisor before committing your cash.
Avoid feeding on investment tips for quick returns that are peddled on media platforms you can’t verify. There is no secret formula to genuine investments or high-level stock trading advice.
Walk the straight path of investment and have a legal fall-back plan when the worst happens.
The writer is an investments associate at Cytonn Investments.
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