If you approach investment like you do a game of dice – leaving it all up to chance – you will no doubt find yourself in a position of loss soon enough. Investment decisions should only be made with a solid foundation of knowledge.
With that said however, even armed with an abundance of investment knowledge and experience, the return of an investment is not certain, and there is the likelihood of financial loss. This is known as investment risk. The good news is it can be mitigated to an acceptable level if one resolves to avoid investment mistakes – beginning with accepting that investments are more of an opportunity to grow your money, but not a guarantee.
Avoiding these mistakes is even more important as we age because our risk appetite changes depending on different time horizon. For a retiree, investment should be done conservatively, as their income post-employment will most likely be much lesser than before, if any.
There are various low-risk investments one can stretch his or her retirement funds. To find out which is the best option for you, see Low-risk investments for retirees.
If you opt to stretch your retirement funds in dividend-paying stocks, steer clear of these three mistakes.
Picking the highest-yielding stocks
Find the highest-yielding stocks and inject your money into that; sounds like a good idea right? After all why invest if the returns are not going to be enough to cushion rising cost of living and supplement fast-depleting funds?
The danger with this course of action is the simplistic manner in which some people hop on the high-yield stocks bandwagon. While Areca Capital Sdn Bhd’s CEO Danny Wong Teck Meng was quoted as saying to SunBiz that better economic outlook and positive global recovery may boost corporate earnings, thus provide better dividend payments, one must factor in the fact that the bottom line of many corporations are affected by price hikes – particularly, the hike in electricity tariffs.
A company may be able to pay better dividends now, but how will doing so affect its profitability and growth? And, will it be able to continue paying higher dividends year after year?
In this regard a market analyst is in agreement, stating that investors need to assess a company’s profit sustainability and capital expenditure requirement, as well as the intention of the board of directors and the future growth potential of the company, before deciding to invest in a company.
Bottom line: Do not decide on a single company by just looking at the yield of return. Consider other factors as well.
Overpaying for security
While it may seem that stocks are only for investors who are willing to accept a certain amount of risk, that is not entirely true. Many more conservative (i.e. low risk appetite) investors opt for stocks of large, well-established and financially strong companies, such as Procter & Gamble and Coca-Cola. These types of stock are commonly known as blue-chip stocks.
Blue-chip stocks typically pay lower dividends, but that is not the drawback as the dividends paid are usually quite attractive – albeit lower in quantum. The main drawback with blue-chip stocks is the level of demand for them. High demand has caused valuations to rise.
Bottom line: A good practice to adopt if you are looking to buy blue-chip stocks is to check the company’s P/E ratio and other related market data.
Ignoring the threat of rising interest rates
Many investors may be ignorant to the way interest rates affect their investment in stocks. The same way individuals borrow money from banks, companies borrow from banks to expand their operations as well.
When interest rates rise, it becomes more expensive to borrow money, so companies might be less inclined to borrow or will borrow less, and without funds, growth slows down and thus profits.
The deceleration in growth and declining in profits will ultimately cause the company’s stock price as well as dividend payouts to drop.
Bottom line: Look at the bigger picture before deciding to invest in a stock.
So, in the end while not investing is no longer an option in this day and age, investing blindly will not help you achieve your financial goals either. However, with research and a conscious effort to avoid these investing mistakes, one can mitigate if not prevent financial damage.
