There is certainly no shortage of ways to invest your hard-earned money, but unfortunately not all of them will be good for you. In fact, some of them will be downright dangerous and/or damaging to your wealth goals. Here are five strategies to avoid.
1. Speculating
If something sounds too good to be true, then it probably is. Many such opportunities are speculative. If you are simply throwing money at something and hoping to get a result, you are speculating. Conversely, a successful investor is someone who:
- Knows the level of risk upfront
- Knows the level of return upfront and
- Knows their investment timeframes upfront.
If, don’t know this information with a high degree of certainty then you are probably speculating on all, or a part, of your result. And speculating is to be avoided.
2. Investing in an opportunity that you don’t fully understand
Unfortunately, not all investment salespeople are trustworthy. There are plenty of sharks and cowboys out hoping to entice you to consider their latest cryptocurrency play, olive tree venture, or Initial Public Offering (IPO) – and often encouraging you to leverage yourself to the hilt to chase their promised high returns. I will admit that when I started out in my investment career I was seduced more than once by these slick-talking salespeople with their promises of quick riches. The problem is that despite multiple university degrees I was under-educated in financial markets and therefore unable to know exactly what it was I was doing (other than draining the bank account of course). While, it may not be super sexy, it is always far better to invest in things you understand, and build up a high level of skill and experience in those areas.
3. Investing without a plan
This is probably the number one mistake that we see novice investors making. They simply look at each opportunity as it presents itself without being able to assess each opportunity relative to their own long-term plan. Perhaps the most powerful question you can ever ask of any investment is “Will this investment help me get closer to my goals, or will it take me further from them?”. Obviously, you can only answer that question if you know exactly where it is you are going, in what time frame, and by what means of investment.
4. Following the crowd
When you get in a taxi or an Uber, and your driver tells you about the two properties they bought last week in Sydney, then your hairdresser tells you she and her husband have just bought their fifth investment property and the markets are going sky high, it is really tempting to jump on the bandwagon and just buy anything because everyone else is doing it. All of a sudden you are suffering from F.O.M.O. -- Fear of Missing Out.
Instead of blindly following the crowd, it is far better to do your homework and or pay for the right professional help, rather than racing out to buy an investment property in the wrong area, at the wrong price, and at the wrong time of the property cycle. Warren Buffett, the legendary share investor once said “be fearful when others are greedy, and greedy when others are fearful”. This refers to the principle of being counter-cyclical, or contrarian. While there will be times to follow the crowd, there are also times when you need to go against them. To paraphrase Kenny Rogers, “knowing when to hold ‘em and when to fold ‘em” are invaluable investment skills that typically take time to learn and develop. Alternatively, you may choose to find a mentor to learn from and leverage their time and experience instead of learning from costly mistakes.
5. Constantly changing tack too soon
Typically, many of the very best investment strategies are slow and steady. You might even call them boring. So, if you are investing to find your adrenaline fix, or because you really don’t like sleeping all that much, you might be tempted to want to chop and change your investment strategies regularly. For many investors the results seem to be taking too long, and they become impatient looking for that “next big thing” that will provide them with all of the riches they want, in the shortest possible timeframes. Our experience has shown us that most of the time changing tack too soon will prove to be a mistake. That is not to say you should not regularly review your strategy and look for ways to improve upon it, but than making wholesale changes searching for that holy grail, is usually going to be counter-productive to your long-term wealth creation goal.
Matthew Bateman and Luke Harris are co-founders of The Property Mentors, a Melbourne-based business comprising an elite team of property professionals who educate, motivate and facilitate clients from all around Australia. Their new book, Let’s Get Real (Major Street Publishing $29.95) is now available. For more information visit www.thepropertymentors.com.au
