Question: I’m planning to invest in stocks and mutual funds. I have officemates telling me on how they profited from them compared with bank deposits. What they tell me are all great stories but I know that along the way they made mistakes with their investments and probably just shy to share it me. I hope you can share with me what investment mistakes that I need to avoid to protect my investment and guarantee I won’t lose money. Thank you. – Liane Y.( by email)
Answer: First, let me tell you that while investing in the stock market or any paper assets can be financially rewarding, it also exposes the investor to various risks. The possibility of losing money is one of those risks that you might encounter on this investment route. There are no guarantees, only possibilities.
As of writing, the year-to-date return of Philippine Stock Exchange Index (PSEi) is around 9%. It means if you have invested in an index fund at the start of the year, your investment have grown by 9% already. The promise of higher returns compared with your regular rainy day account is one of the reasons that more and more people are now considering stock market investing.
If you are just planning to invest, let me point out these common investment blunders that can costly if you are not careful with your investment decisions.
1.Investing in products that you do not understand: If you cannot explain the investment product properly with a peer, chances are you do not understand it; and if you cannot understand it no matter how many times it is explained to you, you are better off walking away from that investment product. Educating yourself and understanding where you invest your money is halfway victory for you.
2. Investing funds borrowed at high interest: This is one of the common questions I often get from people who desperately want to invest. Can I take out a loan and invest the proceeds in the stock market or pooled funds? They think that by borrowing money and investing it in the stock market will yield them positive results. Not necessarily. Remember, the money you have borrowed carries interest that is fixed and guaranteed while your investment offers no guarantee of profit higher than the interest you are required to pay for your loan. While some seasoned investors found success in leveraging debt, I don’t recommend this for people who are just starting out on their investment journey.
3. Investing while carrying huge outstanding credit card debt: One of the best investment strategies is paying off first what you owe. There is no sense in earning 20% from your investment if you carry credit card debt that claims as much as 42% interest annually. You might think that you are saving; but the truth is you are losing a lot more carrying forward your credit card debt.
4. Putting all your eggs in a single basket: A prudent approach in investing is diversification. It simply means spreading and managing your risk by dividing your funds among securities of different industries or different asset classes. In this way even one company or industry where you are invested in falls apart, your entire portfolio will not suffer heavily. Sometimes the best offense is defense. Proper diversification offers you a solid defense in varying market conditions.
5. Chasing profits: Every investor’s goal is to earn money. However, sometimes with the desire to earn a profit from the investment some people try to buy and chase investments that are past their momentum stages. When more and more people, even your trusted barber, are talking about how hot a particular stock is the chances are this stock will be overbought and overvalued. The natural effect when this happen is that this hot stock will go downhill. Not all headline news you read is a sure ticket to profit land. Investigate before you invest. Study the investment and stick with your investment strategy.
6. Ignoring investment risks: Every investment medium carries a degree of risk with it. There is no such thing as risk-free when it comes to investment. Sometimes, people try to ignore the need for understanding the risk because they always think of the brighter side of things and fear that once they get to know the risk associated with their investment, it will prevent them from proceeding with their investment plan. Unfortunately, ignoring the risk involved to conceal your fear will ultimately lead to financial disaster. Understanding the causes and effects of risks inherent in your investment choices will help you sleep well at night even during market downturns.
Cheers and Good luck!
Jesi Bondoc is a registered financial planner of RFP Philippines. He is the director of My Wealth MD and Partners, Inc. specializing in investment advisory and oversight. You can send your money questions at firstname.lastname@example.org or email@example.com and they will be answered in his next article. For more information about Registered Financial Planner program, e-mail to firstname.lastname@example.org or text <name><e-mail> <RFP> at 0917-9689774.