Protect Your Money: Avoid these 5 Investing Pitfalls

Protect Your Money: Avoid these 5 Investing Pitfalls.

by: Kendrick Chua

No investor has been spared from losses in his entire life. Even the legendary Warren Buffett has had losses only they were not as publicized furiously as his successes.

Your money is a product of your hard-work that is often accompanied by your sweat, tears and blood. It is but natural for you to guard it against forces out to take it. In my short period of time as an investor and trader, I had my own fair share of investing mistakes and I’d like to share them to your readers lest you make them as well.

1.) Not diversifying your portfolio

Cliché as it may sound, the “don’t put all your eggs in one basket” is adamantly true especially given the economic crisis is lingering longer that what we hoped. Everything should be in equilibrium and that includes your investments.

I made the mistake when I put everything in equity-related investments whether it was through mutual funds or direct stock investments. As a result, my investment suffered a 40% paper loss. It is no doubt a hard pill to swallow.

2.) Investing at the heat of the emotions

Envy and Greed are deadly sins as I have wrote in my Money Sense article. Just take the historic bull run of the PSEi from 2003 to 2007. The index managed earned a whopping 300%. Savvy investors should have took profits and waited on the sidelines and wait for a correction before pouring in more money. But since everyone thought that sky was the limit and that there was no stopping the index from breaching the 4000 mark, everyone just kept investing.

And those who have been convinced that the index will never come down joined the bandwagon. They are fearful to be left behind and just can’t stand that others are earning huge from the stock market. Bad move. They just realized their worst fears-market crashing after they have made their investments.

3.) Invest with the money you can’t afford to lose

In the book The Greenspan Bubble, there was a story about a man who invested all his life savings into a tech company during the dot-com bubble. The company crashed just like several more others and his entire life savings went up in smoke. Worse, he had put margin calls on his trades and even if he sold his house, he was still in debt.

The retirement money was created for that specific purpose. Don’t make the same mistake just like the man. Retirement funds, education funds or even the wedding funds you painstakingly put up should be guarded prudently. Just look for instruments that can combat the inflation rate and you’ll do just fine.

4.) Not doing enough research

At the heat of the mining boom in 2006 I joined the bandwagon in trading mining issues I know nothing about. Stocks like Geograce (GEO), Nihao (NI) and Pacifica (PA) were some of the issues I invested and traded. I had only one logical explanation for doing so-everyone was doing it.

When the crisis struck, I ended up having to cut heavy losses and some have depreciated 90% of their value that I can’t stomach selling right now and at these prices.

5.) Not having enough emergency funds before investing

In prudent financial planning, having an emergency fund equivalent to three to six months is recommended. Even though I am not a beginner when it comes to financial planning, I ended up violating this cardinal rule. My reason was I don’t want my funds sitting idly and just earning one percent from the savings account or money market funds.

Right now, I’m very illiquid. All my holdings are down. Worse, businesses are not as hot as before. Had I put up an emergency fund before, I wouldn’t be so hard hit by the crisis. Lesson learned…painstakingly.

These are my personal experiences and I hope you don’t make the same mistakes. They’re not very pleasant, mind you. Wise is the man who learns from his own mistakes but wiser is the man who learns from other’s mistakes namely, mine

Tags: investment strategy

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