Stock market assets are like power tools. Use them right, and they’ll help you do amazing things. And since assets don’t come with a safety manual, we figured we’d better produce one. So here are the five things you want to avoid doing:
1. Having No Specific Goals
The most common mistake is to think that ideas like
“I want to make pots of money,” or “This is going to earn me enough for a condo” are investment goals.
These are the outcomes of investment goals.
A proper investment goal (or plan) must be quantified, and must have a time frame. For example:
“I want to make $1 million by the time I retire in 30 years“, or
“I want to raise $100,000, to make the down payment on a condo in seven years“.
When you don’t have clear targets, what tends to happen is:
- You don’t know when you should re-balance your portfolio or change your approach. That’s because you won’t have a clear goal to measure your success (or failure) against.
- Your decisions become impossibly difficult. Without clear goals, how do you properly choose between blue chip stocks, high yield bonds, perpetual income bonds, or any of the thousands of options? Chances are, you’ll end up buying the “flavour of the month”, and your portfolio becomes a jackpot machine.
- You won’t have a clear sense of how to evaluate risk. If you have a long term goal, for example, you may be able to decide volatility’s less worrying than low returns. But if you have no specific goal…well, who knows?
To get started, you may want to check out some of the content at the free investor portal, SGX – My Gateway. There’s a whole host of good educational material there to help you get informed. Getting advice from a professional financial advisor is a good step once you are armed with some basic information.
The focus would be to work out: (1) how much you want to make, and (2) by when.
2. Investing With Zero Savings
Some people are so eager to invest, they ignore the need for savings or emergency funds.
Then when they need cash, they end up with two options: Sell their assets to raise the money (thus derailing their investment plan), or use loans.
The latter option can kill the benefits of investing: There’s no point having a great Exchange Traded Fund with 9% returns if you also use, say, a credit card with 24% interest.
Savings are a different category from investments, and the two are not interchangeable. It’s tough, but you really need to set aside money for both.
Ideally, you should work towards building an emergency fund of six months of your income, even as you invest. If you ever need to liquidate your assets in a rush, you may be forced to sell them at a loss.
Remember, just as you can start saving with modest amounts each month, you can also start investing with as little as $100 a month using Regular Shares Savings plans from banks and providers like OCBC, Phillips and POSB.
3. Not Monitoring Your Investment Products
How does your employer decide what to pay you?
Chances are, you have some sort of key performance indicator (KPI): Sales quotas to meet, production capacities to reach, etc. Your employer probably expects you to meet certain targets, in order to justify your pay.
When you make an investment, you’re basically in your boss’s position: You’re paying money for something which you hope will achieve certain KPIs, thereby helping you reach your investment goal.
Assuming you have concrete goals, you’ll know the sort of returns you need.
So if you have to generate at least 7% in annual returns, and the investment product you hold is consistently getting you less, then you may want to re-consider your investment.
Just as your boss would fire someone who falls short of KPIs, investors should evaluate their investment holdings for poor performers. You should also make it a point to check often. Don’t ignore your investment for five years, and then find out its value has declined to, well, peanuts.
4. Mistake Financial News for Financial Advice
Financial news is just that: News. It has never been meant to take the place of financial advice, nor is it meant to give you buy and sell signals. That’s the job of indicators and your stock broker, not the nine o’clock newscaster.
Do remember that the news that follows the stock market, and not the other way around. So by the time you hear reports about various stocks, bonds, investment products, etc, the changes you’re hearing about have already happened.
If the news is saying stock XYZ’s rising rapidly, guess what: It’s already risen. By the time you hear the news and go for it, chances are you’ll be buying high.
Also, you should be wary newsletters or magazines that tell you which exact stocks, bonds, or investment products to buy. If someone had accurate information on a “sure-win” investment, why do you think they’ll sell it to a magazine? Or give it away for free?
5. Getting Impatient
Movies featuring the stock market tend to give the wrong idea. They leave the impression that millionaires are always made in an instant, or that one hot tip will change an investor’s life in seconds.
There’s no denying it’s possible, but only in the same way being a lottery winner’s possible. It’s something reasonable people don’t count on.
Nonetheless, a lot of new investors don’t “get” slower methods like collecting dividends. They don’t buy assets like index funds, or sit on blue chip stocks. They’d rather try to time the market, and make fast dollars in active trading.
Now this could generate money faster, but it also loses money faster. Remember that every trade requires two correct decisions: When to buy, and then when to sell. Guessing correctly is like trying to win a coin flip game; one in which to win one round, you need two correct guesses in a row.
A MoneySmart Investment Series in collaboration with SGX
This is the fifth article of a 6-part series, focusing on investment for beginners. For more on starting your investment plans, like SGX on Facebook and subscribe to SGX My Gateway here. In this series, we’ll be introducing you to the most basic elements of the stock market, and how a non-expert can still profit from it. If you are new to this series, do read the first three parts here:
How do you avoid investment mistakes? Comment and let us know!
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