9 years ago investing85Jake

10 Stupid Mistakes That Small Investors Make

When was the last time you regret about investing your money somewhere? And when was the last time when you regret for not investing them? To me the first happens very rare, but the second – every day. Missing good opportunities is not the only mistake that small investors make.

Investment Mistakes
Photo by pshutterbug at Flickr

Keep your eye on any of the following:

1. Investing more than you can afford
Any chance that you have not done that ever? I do this mistake all the time. I see a good investment opportunity and am ready to arrange funds for it even if I am not in the best financial situation at that moment.

If you can’t evaluate your financial assets and foresee your future expenses and income, you won’t be able to do good financial planning. As a result of this you’ll often miss investment opportunities or will get opportunities that you can’t really afford. Know your financial situation.

2. Not following a strategy
It’s easy to start jumping from opportunity to opportunity. The reality is always giving us more opportunities that we can handle and it’s very hard to evaluate them all and choose the best.

There are two ways to solve this problem – the first is always to take the right investment decisions. For most of us this is not achievable.

The second way is to have a strategy. This is what I do. I have set specific goals, amounts that should be invested, target ROI and limits. When I see an opportunity I know does it fit my strategy or not. If it doesn’t fit, usually I’ll skip it without regret.

Create a strategy and follow it.

3. Not using other people’s money (OPM)
If your income is not very high, it’s unlikely that you’ll reach huge profits from your investments. Many good investment deals have higher threshold and may never be accessible to you… unless you use other people’s money. Most small investors are afraid to do that and can never grow.

If you think the only way to do this is to create an investment club, you are wrong. The banks, your friends and relatives, leasing, other credit institutions – this all OPM. Most people think it’s wrong to buy things on credit but they are only half right. If you have something to do with your money – something which brings higher ROI than the credit card interest – then don’t hesitate to buy everyday things on credit.

Use OPM for better results.

4. Following the crowd
When the mass media start screaming about a financial crisis it’s already too late. If you read in the newspapers that the home prices or stock market is falling, it’s already too late to act. Many small investors follow the crowd and become a part of all the disappointed people who lose a lot in bear markets.

Avoiding this is actually simple. If everyone is doing the same thing on the market that same thing will get devalued sooner rather than later. So when everyone start buying houses, you beg to differ.

Watch closely what the masses do. And then do the opposite.

5. “Investing” in strangers. Many small investors get disappointed by the results of their conventional investments. That’s good because disappointment is the first step to taking action. But very often when you start looking for alternative opportunities you will be presented with fake offers. They come from strangers and in most cases you will be asked just to wire money somewhere (or worse – to send e-currency) and wait for the profits. In most cases you’ll get involved in a pyramid/ponzi scheme.

Don’t invest in strangers. Always know whom you are giving your money to and have full control over it

6. Bad diversification In every single guide about investing you’ll read “diversification is the key”. But do you really follow the advice? Most small investors have enormous share of their assets invested in real estate. Others heavily put their money on index funds or other mutual funds. How bad the things can go when a recession start? The falling home prices drag the stock exchange and funds with them. So even if you diversify between real estate and funds you are still at huge risk.

Diversify in different classes of assets. If you diversify in real estate, stocks, precious metals, foreign currency, education, brick and mortar or web business, CDs and commodities you will always be protected. (The downside of such diversification is that you’ll rare achieve high returns though)

7. Buying liabilities instead of assets Many people confuse assets with liabilities. Some buy new car thinking it’s an asset, other move to a larger home or buy a vacation house thinking it’s an asset. Really, sometimes buying a car or vacation home is an asset, sometimes it’s a liability – it all depends on the purpose of using. Just because someone else makes money from an asset, doesn’t mean you’ll be making money from the same.

It’s really simple: assets put money in your pocket, liabilities cost you money. Don’t mess both.

8. Procrastination How much money do you keep scattered in debit cards and bank accounts and doing nothing? Many small investors keep unused money waiting to collect bigger amount so they can invest in something big.

What stops you buying highly liquid assets with this money? You can always sell the assets when you have enough for the “big deal”.

Don’t be passive waiting for the “big deal”. Always invest your free money (or you are very likely to spend it for junk)

9. Accepting investment advice and referrals from amateurs. This may sound like “don’t read this blog”, but fortunately I am not giving you investment advice *grin*. Many investors will read blogs and review sites online and blindly follow the advice given. But there is no such thing as generic financial advice – what is appropriate for my financial situation and goals may be absolutely inappropriate for yours. Another problem is that many internet advisers recommend investment opportunities for financial gain – they may receive commission if they refer you as client, so such publishers are not always objective.

Don’t accept advice where and how much to invest. Take the decisions based on your specific monetary goals

10. Missing opportunities We all do this. We miss opportunities because we are afraid not to lose money. But losing money is not such a big problem, if you gain a lesson. Don’t miss good opportunity because of fear.

Train your investment courage not to miss good deals.

Jake