Highlights in this issue:

*** Are you spreading your portfolio to thin…
*** The number one thing you should have avoided…
*** 8 ways to correct your investment errors – before it’s too late…

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From the pen of Karin Iten…

Dear Investment Academy Reader,

Like all long journeys, you simply can’t go anywhere without careful planning and a map. It’s simple really. If you don’t know where you’re going, you’re sure to get lost along the way. And, the world or stock market investing is no different… if you neglect to set specific guidelines and targets, you’re investments are set to fail.

For the past few weeks, my team and I have been stripping the pretentious and often terrifying layers of beginner investing away. Having looked at the basics you might now be tempted to rush head long into the exciting world of investing. (Even as a successful, seasoned stock market player, you too may be guilty of this.) So in today’s article, I’m going to be looking at the most common investment mistakes out there and how you can prevent yourself from falling prey to them.

If you’ve already started investing, give yourself a round of applause! The biggest mistake anyone can make financially is to not invest at all. Win or lose, by making your money work for you, you’re well on your way to financial freedom! That said, only invest when you have your own financial situation under control. By first cleaning up your credit and paying off your loans, you’ll know just how much money you have to play with.

And since most of you have already taken your first, tentative steps we can consider this first hurdle overcome.

Investing mistake #1: Don’t put all your eggs in one basket

Investment guru Warren Buffett once said: “Wide diversification is only required when investors don’t understand what they are doing”. Although the merits of diversifying your portfolio can never be stressed too much, Buffet has a point! Like everything else in life, diversification can be taken too far.

But don’t just trust my word; let’s look at what the numbers say! Let’s say you invest R12,000 in 12 different shares equally this means you have a R1,000 coverage on each company in your portfolio. Splitting the same amount between two or three different shares, on the other hand, won’t only increase your exposure to risk, but also your exposure to reward. And with risk and reward come big profits!

From this example it’s easy to see that spreading your investments too thinly will mean tiny profits. In addition, don’t forget to take your broker’s fees into account. Over trading and over diversification may eradicate any profit you make from your investments.

Investing mistake #2: Clock watching

One thing to remember is you’re an investor NOT a trader. This means you’re in it for the long-term! Set a time horizon and always keep it in mind! How long you invest will be directly determined by your investment goals.

If you’re looking to make a quick buck (investing for a short period of time), trading is for you. Investors, those who are looking to build long-term wealth, on the other hand, will look to invest in shares, equities, fixed income funds, etc. instead. Remember, the longer you hold onto your investment, the greater chance you have of making fabulous returns!

Investing mistake #3: Don’t overreact

Panic – the most dangerous feeling to react to – is an emotion heavily steeped in fear! Bumps in the road are unavoidable! You’ve taken the time to research your company well so stick with it! And chances are you’ve chosen a winner. But, if you run when the first breeze starts wafting, then you’ll never know! As Nathan Rothschild, one of the founders of the international Rothschild banking dynasty, once said: “buy when blood is running in the street.”

If you’ve done your homework and know you’ve picked a winner, market volatility can be the perfect opening for doubling your exposure to the share… and at a cheaper price too! That said, it’s imperative to periodically reassess your shares, since the ultimate secret to success is dumping the losers and keeping the winners.

Getting it right

Okay, so now that you know what to avoid, here are a few helpful tips for keeping your investment on track:

*** Do your homework,
*** Get the right mix of asset classes,
*** Diversify your portfolio,
*** Have a clear idea of your investment timeframe,
*** Understand what your future financial requirements are,
*** Know what type of investor you are (long-term, short-term or a trader)
*** Periodically check your portfolio,
*** And always keep your goal in sight!

If you stick to these simple, but effective, rules and avoid making these common, costly mistakes, your investment journey should be pretty smooth!

Remember, the great investors aren’t only consistent in their thought process, they’re savvy enough to keep double checking themselves to ensure they’re not making the basic mistakes! Are you?

Here’s to your financial freedom,

Karin Iten
For the Investment Academy