5 Investment Basics We Should Remind Ourselves Of (And The Pitfalls To Avoid)
Investing can be as simple as making an omelet, or hard-boiled egg. What was soft, soggy and uncertain can be turned into something solid and nutritious (in this case, financially). But to get from gooey egg to delicious breakfast, investors should avoid certain pitfalls – at all cost!
Most investment experts would advise you to always exercise caution. Being sceptical is not only about being cautious but also about having good knowledge and experience before plunging into your next investment decision.
However, risks aside, smart investment is not synonymous to rocket science. Here’s how everyone can get a taste of investing by getting back to the basics.
1. Digest valid information first
Information is king. Before you put your money in, you need to know as much as possible about a potential stock including the daily input of its performance and how the company does in the market. On top of that, always be aware of how that particular industry is faring.
Ultimately, the information you refer to should be a lot more credible than Madam Zorras’ vision after peering into a crystal ball. There are plenty of these “seers” under the guise of investment experts. Be careful and strive to stay ahead of them.
2. Avoid sudden decisions with your smartphone
Your smartphones may be good for not just selfies, but also keeping you abreast of market happenings and helping you make prompt decision. However, this can come at a cost if the prompt decision is not made with full consideration.
Warren Buffet once said, “Only buy something that you’d be perfectly happy to hold if the market shut down for ten years.”
If the foundation is right when it comes to choosing the right investment, you will not be swayed by sudden market movements, and thus, you won’t panic every time you get news on your smartphone.
3. Remember your age and goals matter
Always go back to the drawing board when it comes to making an investment decision. The drawing board in this case would be your age and your financial goals.
It’s true that the younger you are, the more reckless you can be. However, it is only because you have the room to make mistakes. The age horizon plays a huge role in a person’s investment portfolio.
Though you may be investing for years, it is always wise to go back to the drawing board once in a while and review your investment portfolio to fit your age horizon and your shifting goals.
4. Put all your eggs in the basket you know everything about
Some would swear that differently coloured M&M chocolate candies taste different, when actually the only thing that differs is the appearance. The same applies to your preference for your variety of investments.
Diversification is important, but it is not compulsory at all times. During financially turbulent times for the stocks you are holding, you can minimise the risk by spreading your investment to a few asset classes. However, if times are good, you can reduce your diversification (given you’re well informed about it) and as a result, increase your returns.
With mixed choices, you may have one portfolio hitting the dirt and even biting the dust, while another soar like a kite. This helps reduce your risk but at the same time minimises your gains.
5. Kick back, occasionally
It pays to be calm, calculative and well informed. This patience will pay off when it’s the right time to strike! Just like the fable about the rabbit and the tortoise, the slow and steady wins the race.
Being rash means you will likely slip up. With intrusions, challenges, and changes in the sociopolitical environment that you didn’t consider, you could turn your thousands of Ringgit into nothing more than a memory.
Learning from history and sticking to the investment basics may just save your investments. Many people have made big losses simply because they started over thinking their investment strategies and over complicating their decisions. Sometimes it pays to take a step back and just look at the basics.
This article was first published in May 2014 and has been updated for freshness, accuracy, and comprehensiveness.