Caution is a wise companion to any major investment decision.
The CFA (Chartered Financial Analyst) Institute urged would-be or neophyte investors to keep this in mind to avoid common investing mistakes.
Observing May as “Putting Investors First Month,” the CFA Institute, a global association of investment professionals seeking to set standards for professional excellence, reminded investors of some common mistakes that can be avoided.
April Tan, president of CFA Society Philippines, said practicing caution or doing some careful planning are key steps to take.
A lack of strategy is a primary mistake that can be avoided, but should be used as a guide for future investment decisions, Rob Ramos, first vice president and trust officer of Union Bank, pointed out.
“A well-planned strategy takes into account several important factors, including the time horizon, tolerance for risk, amount of investable assets, and planned future contributions,” he said.
Ramos added that it is also a mistake to invest in individual stocks instead of a diversified portfolio of securities.
He advised investors to diversify their investments by putting their money in a mutual fund or index fund because investing in an individual stock carries “high risk.”
“Investing is not gambling and shouldn’t be treated as a hit-or-miss proposition potential. Analyze the fundamentals of the company and industry, not the day-to-day shifts in stock price,” the CFA said.
Other mistakes often committed by investors include buying high and selling low and churning your investments, or too-frequent trading cuts into investment returns.
Relying on the media alone as their sole source of investment information rather than pursuing a professional relationship with an advisor is also another common investor mistake.
He said investors are often hard-pressed to cite specifics on the fee structure employed by their investment service provider, including management fees and transactions costs.
While individuals should be aware of the tax implications of their actions, the first objective should always be to make the fundamentally sound investment decision.
Some investors, rather than pay a large capital gains tax, will allow the value of shares in a well-performing stock to grow so large it accounts for an inordinate percentage of their overall portfolio, the CFA said.
Investors also commit a mistake when they have unrealistic expectations of their investment and they lack basic knowledge of where or how to start.
Lastly, investors also often do not know their real tolerance for risk.
“Keep in mind that there is no such thing as risk-free investing.
Determining your appetite for risk involves measuring the potential impact of a real dollar loss of assets on both your portfolio and your psyche,” the CFA said.
In general, individuals planning for long-term goals should be willing to assume more risk in exchange for the possibility of greater rewards, it added.