10 Common mistakes beginner must avoid in investments - OPID News

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Tuesday, 10 November 2020

10 Common mistakes beginner must avoid in investments

 10 Common mistakes beginner must avoid in investments


Investment has become a necessary part of life in order to grow your wealth and achieve financial objectives. Due to rising inflation, it is becoming difficult to save enough to achieve simple financial goals like going on a vacation, buying household appliances.

Most people don’t have enough income to have considerable savings for their future. Housing prices have risen considerably since 1970s worldwide with most people spending as high as 60-70% of their income on the house rents alone. Nigeria is seeing constantly rising inflation rate of 13.7%, with pressure from currency devaluation making everyday commodities unaffordable for most people.

An average person today can’t even afford basic necessities let alone future goals. Today, it is more difficult than ever before to gain enough wealth to achieve long term goals like buying a house or retirement planning without considering investing.

However, with planned investments into suitable instruments, individuals can build their financial future if the right steps and required precautions are taken.

Due to a large number of options available and various pros and cons of each instrument, it can be quite difficult for beginners to make the right decisions regarding investments. Most of the new investors make common mistakes which makes them prone to heavy losses and unwanted outcomes.

The following are the common mistakes that must be avoided by new investors in Nigeria for better outcomes.

1. Over Investing

Short term gains can be quite attractive for beginners which sometimes end up over investing in the initial days. Investment in any financial instrument involves a certain risk factor that must be considered before making any investment decisions.

Investing more than you are willing to lose is a malpractice that must be avoided by all investors.

Beginners must have a fixed proportion for savings and investment to achieve the predefined financial objectives. You should check the worthiness of investment while considering the risk to reward factor before jumping to any decision.

2. Investing Without a Plan

Investments should always be done according to a predefined plan after considering every financial aspect of your budget and analysis of various investment instruments.

New Investors should make a plan with a preset allocation from the monthly earnings. The financial plan must cover every need and requirement along with setting aside emergency funds.

Investors should stick with their financial plan with discipline and perseverance. The short-term volatility or personal desires must not interrupt the financial plan made to achieve a long-term goal.

3. Setting Unrealistic Goals and Expectation

Setting a realistic target is quite essential in the investment world as an investment without an objective will lead you nowhere. You should always have predefined financial goals and must make an investment plan to achieve those goals in the most convenient manner so that you don’t stop it.

Goals and expectations must be realistic and should consider your risk-taking ability.

Financial instruments that deliver high returns generally involve higher risk and one should not expect to gain tremendous returns without taking the risk.

Investment is a slow and steady process and cannot make you rich within a month or a year. The expectations and target must be real while the path to achieve the target must be suitable and comfortable.

4. Following Deceptive Advice & Recommendation

Investors must keep a distance from the fraudsters in the financial markets that provide free or cheap advisory to cheat the inexperienced investors for self-interest. Investors should make the required efforts to check the legitimacy of the financial advisor they follow and the recommendations they take.

Each product/instrument of every capital market is ideal for different types of investors. Hence, the advice and recommendations must be rechecked for the suitability and objectives of the investors.

5. Investing Without Education & Understanding

Knowledge and education about the chosen capital market & financial instrument can play an important role in enhancing the chances of positive outcomes.

Beginner Investors must always avoid investing in complex instruments like Bitcoin or forex trading or CFDs on commodities, indices etc. which require deep understanding and years of market experience. In general, all investors must avoid any capital markets or financial instruments where they lack prior understanding, education and experience.

Before investing in any of the financial instruments, make sure that you know its every aspect and are educated about the underlying capital market & its principles.

The research and analysis of the chosen investment tool can assist in predicting its price movements & the potential factors that can affect its prices. New investors must also make effort to learn about the available features like stop-loss, leverage, etc. to make the most out of chosen capital markets.

6. Not diversifying your investments

An investment portfolio should always be well-diversified as investing the whole amount in a single investment can be risky at times. Diversification is a technique of spreading the invested amount into multiple instruments, tools, or industries to maintain consistency in returns while reducing the risk factor.

Diversification reduces the risk exposure of investment towards any particular financial instrument. A single investment can face drastic outcome or deliver unfavorable returns due to any reason.

However, if the investment is done in multiple ventures, the volatility of one instrument will most likely be balanced out by returns of other investments in the portfolio.

7. Selecting a Wrong or Fake Brokerage

The selection of a broker is one of the most important steps for investor safety. The broker acts as a medium between Investors and the Capital Markets. It provides a platform to carry out the investments.

Each broker charges a different commission for offering trading and investment services which may also differ based on instrument offered.

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Brokers must be regulated by a government entity or regulator as they safeguard the investors and keep an eye on the activities of the broker. Choosing an unregulated broker may compromise your investments.

African broker comparison website Forex Brokers SA recommends “Investors must check and compare all the available brokers in Nigeria and select the most ideal broker that is well regulated for the instrument you want to trade. It must have a good reputation, offer quality service, and charge reasonable fees.”

“NSE authorized broker must be chosen if you are investing in stocks, while for trading Forex, Bitcoin or CFDs, investors must look out for reputed forex brokers that are regulated with multiple top tier regulatory authorities like FSCA in South Africa, FCA in the UK, ASIC in Australia, etc.”

Some brokers offer multiple types of investment tools at varying charges while others have expertise in some particular tools. New investors must be careful while comparing the brokers and must make adequate efforts to choose the right broker for a safer investment experience.

8. Investing with Emotions

Involving emotions in investments is a common mistake that made by many beginner investors. Greed and fear are the most common emotion that generally force the inexperienced investors to buy at extreme high and sell at extreme low due to the fear of missing out or losing.

The investors must not allow the emotions to interrupt their financial plan or financial objectives. Any investment decision that you make must be based on your research rather than emotions.

9. Not Evaluating Performance/No Evaluation or Revamping

Regular evaluation of the investment portfolio is an important step that is generally ignored by the most investors when they begin. It is important to regularly monitor the performance of the chosen investments and evaluate those.

If any particular element in the portfolio is not performing well or is not suitable for the investment objective, then that must be removed while better performing tools must be added. Regular evaluation and revamping of the investment portfolio are required to weed out the unwanted elements while adding better-performing assets in the portfolio.

10. Eyeing Quick Returns

New and less experienced investors are more prone to fall for the quick return generating financial instruments and end up taking excessive risks in the market. Such mistakes can be dangerous for your capital as sometimes you could end up losing more than you would be willing to lose.

The instruments that deliver significant returns in a shorter time period involve much high risks and are not suitable for most investors.

In the End

Investing early is a good step and it can be positive for you if done right, but can be drastic if precautionary measures are completely ignored.

New investors are quite prone to face severe losses as they lack experience. It is always advisable for the first-time investors to spend more time learning the capital market and use demo accounts to gain experience before investing any real money. The Nation



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