In order to truly maximise your earnings, you have to learn the various ways to invest and reinvest your money. Deciding to invest is first step, however, the second step is the ability to do it right and avoid major financial pitfalls. In the article, I will be sharing the five most common pitfalls to dodge when investing your money:
1. Poor risk management
Everyone has a risk preference, and this risk preference is often tested when we have to decide on a type of investment. Too high a risk may lead to panic attacks for fear of losing your principal investment. Too little risk may leave you feeling like you’re not getting high enough returns. Proper risk management involves finding an investment portfolio that is suitable to your risk preference and your financial situation.
To find the perfect balance, you'll need to start off by discussing with your investment adviser to get a feel of what investments match your risk preference, for instance you could prefer high risk investments like stocks or low risk investments like Federal Government bonds.
The next step is to then match those investments with your current financial situation. To do this, you'll need to set a target date for when you would like your investment returns, and then figure out how much you can afford to invest periodically without hurting your daily expenses. These two steps will help you avoid the risk management pitfall by clarifying the kinds of investment portfolio and level of risk you should be considering.
2. Unrealistic expectations
Like it or not, the simple act of investing alone won’t solve all of your financial problems. This is probably the hardest pill I had to swallow when I started my journey to Financial Freedom. Like I did, you probably think once you start investing, you’ll start making quick returns and before long, all of your financial problems will be over. I am sorry to burst your bubble but all investments have risks, and it is important to tailor your expectations to those risks and the returns associated with them. Moreover, if these risks are well-calculated, they could lead to substantial gains and a vast increase in earnings. To help you manage these expectations, click here for an article on what you need to about investing in Nigeria.
3. Fraudulent Schemes
Fraudulent ‘get rich quick’ schemes are often disguised as investments; and we have the infamous MMM debacle to serve as an important lesson on why this pitfall is one of the most dangerous in Nigeria. I have friends who lost personal and business funds in their quest to be the next Millionaire Mavrodian (MMM participant). As a result, their businesses are struggling with little or no hope of recovery. Please, gambling and all forms of it are not investments! These schemes have no verifiable means of selecting their winners and someone ALWAYS loses out at the end, so I would advise that we avoid them no matter how high the returns they promise. Putting your hard-earned money in such schemes is simply at your own peril.
4. The Do-it-Yourself (DIY) investor
There are so many factors to consider when investing that it is simply impossible to precisely predict when the market is going to peak or when it is at the bottom of a decline. There is so much day-to-day variability in the financial market that trying to figure it all out on your own is a time-consuming pitfall that could, quite honestly, drive you crazy.
The solution to this ‘DIY’ pitfall is simple: outsource your investments' management to professionals and quit trying to be an investment guru in one day. Speak to a certified investment adviser about your concerns, to ensure that you understand where your money is going and you invest in assets that match your current situation. The fees you may have pay will be worth it in the long run because you can then spend time doing more productive activities.
5. All-eggs-in-one-basket approach
The 'All-eggs-in-one-basket' approach is when one relies too heavily on one source of income. This approach is a major pitfall to avoid in investment because it can cause a serious financial nose-dive if that investment happens to fail. However, there is a simple solution to the 'All-eggs-in-one-basket' pitfall, and that is diversification. Diversification in investment simply means having your money spread across a number of different assets, such as: treasury bills, bonds, stocks, real estate, maybe even things like precious metals.
If you effectively spread your money across a range of investments, even if the market takes a dive for one asset, your overall loss will be minimised due to gains in the other assets. Think of this as having multiple back up plans, avoiding the all-eggs-in-one-basket pitfall will help you increase your profit potential while having multiple safety nets.
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