Whether you’re a student, yuppie, parent, or just someone concerned about your financial outlook, (presumed) high interest investing can offer a Janus-faced solution. On the one hand, committing the money may make it inaccessible, though higher overtime yield. As these activities may constitute more of an art than a science, it is normal to shy away from putting your cash to work for you.
Once the decision’s to invest has been taken….
Taking one’s hard-earned and waging it on a potentially high-interest placement isn’t without its dormant bear traps : the risk of loss is a REAL one and we do recommend that you take a good look at educating yourselves beforehand. Matt Bell, a columnist from WiseBread.com listed five of the most foolish investing mistakes that even smart people make which was a good starting point. So here are the five don’ts that can frame the difference between fortune and famine
Investing money you probably can’t afford to risk.
A wise money management skill is only acquired in a process built on progressive saving. Two of the most important steps to take before investing is to build an emergency reserve that covers any essential expenses over a period of three to six months, and secondly, to get rid of all your debts*. This may sound overly secure to some –or perhaps even careless to others– but even the shrewdest investor must concede the importance of avoiding, as best as can be done, the risk of going flat broke on a bad tip or some misinterpreted information.
*The only exception to the debt rule, says Bell, is if your company has a good pension fund. In this case, you may view the nearing income as a sufficient blanket to cover a bit of debt. Although, even he concedes you’re better off investing the money that doesn’t feature in your rainy day fund.
Investments that you can’t put your finger around
Peter Lynch is one of the most famous managers in history. He managed the Magellan Fund from 1977 to 1990 with an average annual return of 29%. Lynch also had the talent of teaching others what to do and what not to do in investments.
In one of his better-remembered pieces of advice, he said that if you can not explain an investment to an eleven year old, you do not understand it enough to invest your money on it.
If you are planning to invest in a specific bond, you have to know how to explain what the company does, where the immediate and protracted problems are and why you judge it as a good investment. The same strategy applies to an investment fund or frankly, any other investments. And you must do all this in a language that makes sense to a sixth grader, Lynch reminds us.
Investments that do not match your investment horizon and temperament
Bell points out that you should think of all your money that you have invested as a single portfolio. That means that if you have $15,000 in a savings account and $35,000 in a RRSP, you have a total portfolio of $50,000.
The type of chosen investment must be based on a resource allocation that is right for your investment’s time and your temperament – better known as risk tolerance. Are you someone who can handle higher risk or do you want steady growth?
Investments that are also miracles (too good to be true)
The mentioning of Bernie Madoff, arrested in the US for an infamous Ponzi scheme, should be enough to explain the element of pain felt by those who lost gaudy sums. The advice offered here is quite simple: every time you hear that you “cannot miss” this (or that) opportunity, or that profitability is “guaranteed”, you should not think twice about making up your mind. Become as familiar as you can with the process to the extent that it seems transparent — and if it doesn’t, run.
Investments you lose patience with (unrelated to value).
One of the most important ingredients for successful investing is time. While people early in their careers, typically, do not have much money to invest, it is often the perfect time to start investing.
The trend to stop investing early in one’s life is a mistake, since you lose the benefit of compound interest over time. Bell concludes his article stating that it is easy to believe that investing is just about playing a great offensive game – taking leverage over all the high values that the market might bring to you – but in reality, it’s more important to play a defensive game, avoiding the mentioned investments.
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(Edited by NZD & AP)