Overview of Investment of Money and Mistakes to Avoid

Saliq J. Khan, CRPC® The economy is crawling out of the pit into which it fell during 2007, the job markets are thawing, confidence level is rising, and investors are ready to invest the money which has been sitting on the sidelines for quite some time. Investors are still fearful, but optimistic that this may be the opportunity to start investing again. The idea of another recession taking place within the next two years is still being talked about, but some investors believe that this may be the time to get back into the stock markets and reevaluate their investment portfolios. Investors must realize that successful investing starts at the heart of understanding the deadly mistakes to avoid. Increasing your wealth is as much about making money as it is about not losing money. The stock markets are up and some investors are seeking opportunities to grow their wealth. Most investors have seen their investment portfolios dwindle and are cautious about getting back into the stock markets. The key to successful investing is not to avoid risk completely, but to understand your risk tolerance and invest appropriately. Lacking Capital to Invest Many investors blindly invest in mutual funds, exchange-traded funds or another form of investment thinking that they are doing the right thing. This couldn’t be further from the truth. Proper investing can’t happen unless there is an adequate amount of funds set aside for this purpose. If you, an investor, have substantial credit card debt, on which you are paying 15% interest, then it may not be to your benefit to invest in the stock markets, which has shown to give an average annual return of just over 10% (not taking into account the financial crisis which occurred in 2007.) Bear in mind, minimizing the amount owed on high interest rate debt is pivotal in creating a successful and well funded financial plan. No Well Defined Investment Goals Investing for your future depends heavily on where you currently are financially, where you would like to be, and your preferred time horizon. Having a vague and indefinable financial plan will undoubtedly hamper success and cause frustration in the long run. Start by creating a list of short and long term objectives which you hope to accomplish and the amount of wealth you will need to reach that goal. Quantifying your goals will allow you to understand the level of risk which you may have to take or the level of increase in savings which you may have to do. Depending on the goal, think about the level of risk you are willing to take to reach that goal and the appropriate asset classes (stock, bonds, mutual funds, ETF’s, etc.) which will help you reach that goal.

Changing Investment Goals Frequently Once you have determined what is most important to you in the short and long term, identify strategies which will help you attain those goals. Some investors feel that it is necessary to modify their strategies every time an economic event takes place. Such a strategy can be costly and not many individuals make great day traders. Day trading, often referred to as legalized gambling, involves frequent trading and is not appropriate for most investors. When you invest in a company, you own a part of that company and are referred to as a shareholder. As the company thrives, so do you. An investor who takes the time to identify great companies should feel confident in the management and the products of the firm. Economic events will always take place, but shouldn’t deter you in feeling confident in your decision to invest in a solid firm with exceptional management. Over / Under Portfolio Diversification Investors are often seeking the next big company which will catapult their investment and provide greater returns. This is likely to result in being over-weighted in one sector and can cause you to lose heavily if that stock doesn’t perform well. Being well diversified will enable your portfolio to sustain a level of growth even if one or several individual stocks or mutual funds don’t perform well. In an effort to diversify the investment portfolio, investors often try to place their money in as many areas as possible to minimize the risk of losing money. Though this appears to be a sound strategy, there is such a thing as over-diversification. Imagine if you had $10 and you put $1 in ten different stocks. If one stock goes up by 10 percent and another down by 10 percent you will not have gained at all. This in conjunction with transaction costs to place a trade can prove to be costly to any investor. Now, if you had $1 in some stocks and $2 in others and the $2 stock went up by 10 percent and $1 went down by 10 percent, you would have realized a gain. Failing to Hire a Professional Many great doctors don’t make great investors. This doesn’t make sense to many; after all, these are highly intelligent individuals with great income. Lack of knowledge in the investment area and overconfidence are the main reasons why many Wealth Advisors have stated that highly qualified professionals don’t always make the best investors. A trusted Wealth Advisor spends his career helping individual investors like yourself and should be utilized to help structure your financial goals. This doesn’t mean that every Wealth Advisor is qualified and well suited to understand your needs. Many appear to take the whole-istic approach in financial planning, but only a few truly understand the full aspects of the industry. Look for a solid educational background and well respected credentials when seeking an Advisor to manage your wealth and your future. Planning for your future is of utmost importance and should be approached with due diligence.