The Pitfalls to Avoid When Investing Your Hard-Earned Money

First-time investors will make a lot of mistakes, especially if they don’t have someone to advise them as to where to invest their hard-earned money. But with the increasing number of investment avenues out there, and more people looking to invest their money for the future, how do we know what we’re doing wrong?

Most of the time, it’s due to ignorance or not doing enough research into where you’re investing your money. Other times, it’s the lack of due diligence, or the careful audit, checks and balances of your investments. These two make for a very fatal mistake in investing. But what else do we do wrong on our investments?

Excessive Fees

So you’ve invested in a mutual fund. That’s great! But if you're paying more in management expenses than you get in dividends and capital gains over a period of time then it might be time to change portfolios.

In the long run, you'll be losing more than you earn, and investments are supposed to work for you, not the other way around. The same goes if you're paying your financial adviser too much and not getting more in investment returns.

Inappropriate Leverage

You've probably done this before: use borrowed money to invest in stocks, as per your adviser's, well, advice. This use of other financial instruments, such as borrowed money, to increase your potential return on investments, is called a leverage. You don't really lose money because the rate of the return on your investments is higher than the cost and interest on your borrowed money.

However, your adviser will benefit through this more than you will. Using leverage often will increase the investment's volatility: good when the investments go up, but really bad when it drops, since leverage will double your risk. Doubling your investments using leverage gives you additional risks, as well as fees and commissions to your financial adviser.

Poor Diversification

You only have one or two investments in one sector. This is a problem. Why? Not diversifying your investment is like buying a car and not getting a comprehensive car insurance to go with it. You aren't protecting your money. Putting it in only one place doesn't guarantee you great returns on the investment. Rather, you’re risking all your money on one investment that can fail.

It's the same with being over-diversified. You are spreading your investments thin, and you end up having to monitor too many markets and values that you get confused where to put your money next. This will result in a mediocre return on investments, or worse: you could suffer large drops in value and lose money.

Momentum Investment

Momentum investing is buying stocks in a market or sector that are "hot." You get too excited that this latest trend is going to boom and succeed that you put too much money into it—only to watch it sink in a few years or months.

Don't play into your greed and invest in the current fad. It might be easy money, but there is a considerably large risk if the markets turn for the worse. Always do your research before putting your money somewhere!

Anxiety

When you start feeling anxious about your investments, it’s your gut feeling telling you something is wrong. Chances are, something is. Trust your gut instincts and double-check your investments; do an audit of all your finances, and review the market. Just remember to do this in a calm and cool manner.

Anxiety can lead you to making bad investment decisions, so take a deep breath and think about the outcome before investing into something! Re-assess your situation before you do something that will badly affect your finances.

About the Author: 
Kyle Kam is an online marketing specialist for Moneymax, the Philippines’ leading financial comparison website. Whenever he’s not working, he’s busy at home watching MMA videos the whole day. You may follow him on Twitter @undisputedkyle

Photo Credit: Michael Theis (Creative Commons)

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