If you've made investment mistakes before, then that makes you nothing except an investor. I'll explain the biggest ones I made and give you the lesson I learnt from each.
It's better to succeed by being boring than fail with something trendy.
If I fail, at least I'll look cool right?
That gets old real fast.
I hear the the word ‘investment' a lot these days, even when we aren't talking about investing.
- The suit that's a real investment piece
- The handbag that is a personal investment
- A dining table made from 100 year old wood
- Invest in a personal trainer for the benefits
We're getting trained into thinking spending money on things we wouldn't normally spend money on are investments.
What I want to talk about here is the traditional financial investment.
- Business (start up or existing).
Something you buy at a price now with the idea it'll be worth more later, and/or provide you income along the journey.
Don't know of any handbags that do that.
I've made my point that we don't buy suits or cars for their financial abilities, so does that mean we just need to buy a house or stock and sit on it until we are rich?
Yes that's the general idea and no not every investment is equal (because that would make it easy).
So how do you get the advantage and invest in something worth your time (and money).
Through my experiences I've found these are some of the most common investment mistakes I've made, while trying to justify the flashy trendy ones.
I ignore the three most important factors of an investment
Before you plant your hard earned down You want to have a good understanding of the potential investments risk, cost and return.
- What's the risk to the money you are putting in?
- How much will it cost you upfront and ongoing?
- What kind of returns will you get?
What I find is that at least one of these three is highlighted when marketing the product, while one other of the three is a serious issue to the product.
For example, I've seen ads promoting a 11%p.a. return on investment. The returns sounds great, but read the fine print and it'll take three months to withdraw anything so there is risk to accessing your money.
A property might be up for sale at a great price, but the rates and ongoings are going to eat into any growth or income you take.
I get sucked into the thing you saw in the news or heard from a friend
It's too obvious to just put the word bitcoin in here.
So when you looking at making a financial return form your money, its much easier to be attracted to the numbers of something more trendy and interesting.
- The new trend that's a certain money maker (fidget spinners)
- A good idea for a cafe that serves only vegan food (that no one goes to after a year)
- That hot stock that everyone at work talks about (but you have no idea what it does)
It's always more fun to win at something that's fun. But in reality it's not the fun stuff that gets us to where we want to be.
Sometimes the boring and beige feeling investments are ok too.
I want to talk specifically about a couple of ways we might naturally make decisions when we invest.
We think we are making good decisions, but we are looking through rose coloured glasses and not seeing the 360 degree view.
Here are a couple of ways I think we go wrong when consider and investment.
I invest in companies I like being a customer of
Some people I know gravitate to businesses they are customers of and think because they have had a good experience as a customer, it's worth owning as a business.
We love to cheer for the things we own. The shoes, the cars, the clothes, the brands.
We like to show this off.
It's nice to be able to invest in a company you can get behind and support, but a good customer does not equal a good investment.
There are instances where this is the case but you can't assume there is a correlation.
It's like that restaurant you used to love going to. Great food, service, nice decor and everything seems to indicate success. Then one day you walk past and its closing down.
You never saw the amount of debt the business was swimming under.
Every experience you had was first class but that only masked what was happening behind the scenes.
Picking companies based on one thing like the service they offer can be misleading.
Stay a satisfied customer and enjoy that.
I think all companies in a hot sector are hot
What's better than a hot stock or company? A group of hot companies that work in the same space.
These days we can invest in funds or ETFs where companies are grouped by sector.
Tech, healthcare or finance are three of the hotter types of sectors.
I invest in infrastructure, which is a group of companies focused on utilities, roads and building things.
There's also ethical and sustainable investments.
Basically there are a lot of ways to invest in a wide range of businesses that are tied to a specific theme.
Note that this theme is not that they good companies. The theme is that they all work in the same field.
A hot, growing sector can still have dud companies in it.
Buying into these funds can feel like diversification but its really just buying the good with the bad.
You might look at the top five tech stocks like Facebook, Google, Netflix etc and think that they give an indication of how good the sector is.
It doesn't work like that.
For every Microsoft there is a Incyte. Both tech stocks but one returned 37% a year over the last 10 years with the other returning .5%.
Sectors do not deliver success, the good companies do.
Unless you have done due diligence on the 100 or 1000 funds that sit in the industry fund or ETF then its hard to justifying owning them all.
Focus on investing in a group of winners, rather than contributors to a sector.
The S&P 500 was designed for this reason – to highlight the winners.
The 500 companies are the best on the US stock exchanges. Yes it is tied to a country but there are international businesses trading on the NYSE and Nasdaq.
Each year companies are added in and out of the index so that only the biggest and best performing companies are involved.
That's why it averages 9.8% a year in the last 100 years.
Tried and tested. Only the successful survive.
I use confirmation bias to confirm my decisions
Say you've found something you want to invest in.
It seems good at face value. You've read what the business or fund has provided, but you want to get a different angle of it.
You start googling for reviews of others thoughts on it, or you talk to a mate/family about the “opportunity”.
You find some forum, article or post on why investing this way or that way is good/bad.
Finding these thoughts that you agree with gives you motivation to make the investment.
I don't like this type of investing.
I don't like it when you try to find external forces that can verify satisfaction with something, just to ease your mind.
This is confirmation bias.
Looking for ways to confirm your decision making, while overlooking the bad.
I know I do this.
I google something and skip over the 10 articles on why not to do something and find the one that says I should because that's what I want.
Like looking at reviews for somewhere you want to go, you ignore the 1 star reviews and look straight for the good ones to verify your decision making.
If you get to this stage with your investment decisions you've gone too far.
You should have an indication through your own due diligence that the investment is sound and worth your energy
- do you understand it – what does it do and how will you manage it?
- do you know the numbers – cost, risk ,return?
- whats the worst that can go wrong?
Answering questions like these should help you make calls that won't need outside help.
To avoid the investment mistakes look at a smart strategy
It takes time, but you will get better at identifying good investments over others. Whether it be real estate, businesses and stocks.
Whats been helpful for me is to have an investment plan that I refer to when I want to invest.
These are easier to build once you have had some reasonable success in the investment type.
Property developer Tim Gurner has a great investment strategy for the properties he delivers. They must be:
- one to three kilometres from the CBD
- have a high cafe culture
- suit the 25-45 year old demographic
- in a very active location
He isn't reading articles, talking to mates about opportunities. He knows his market and targets that.
Can you define the way you invest. Has it been kind of “right place at the right time” or “opportunistic'? I know mine was in my early adult life.
You don't even need to define what you want to do, but confirm what you don't want to do.
I know at this stage in my life I don't want another investment property. I don't want to invest into individual stocks, or more Australian investments. I want to have a years worth of income saved and stay debt free (apart from property).
All these suddenly combine to confirm a pretty decent starting block for a strategy.
Write like you are talking to yourself in the future, what do you want your future self to avoid investments in?