To me, investing money is crucial to creating a future that I can enjoy. We have a limited time to earn money in life (from 16 years of age to about 65) and we should be doing everything within our means to use that money to make more money.
This is how investing can help you. It takes the money you do have, and hopefully grows it over time in order to make you more money. It can also do the opposite bear in mind.
To help mitigate the chances of an investment going bad, you should seek financial advice from a financial planner to completely understand what you are up against when it comes to investing in shares.
With this in mind however, I wanted to share some of the common mistakes people make when investing in shares. Hopefully you can use these common share market mistakes to guide your discussion with you financial planner prior to buying shares.
Buying shares at an extremely high price due to market hype
People often get carried away with media reports and articles from so called ‘experts’. When the masses of society are discussing shares, the prices are going up (as people are buying with more vigour than people who are selling).
Try to avoid buying shares spontaneously because you read an article or got a hot tip from a taxi driver. While it isn’t possible to ‘time the market’ and predict the lowest point to buy, just avoid the hysteria that goes with shares and buy when it is right for you. Ideally you will have a sizeable amount of money to invest to avoid multiple brokerage fees.
Remember, buy shares on value (e.g. is the business a solid one? Is it relatively debt free? Do they pay good dividends?) instead of hysteria.
Selling your shares when the market drops, in turn realising your losses
A colleague I used to work with said a very profound statement to me once; ‘You only really make a loss in shares if you sell them when they are down’.
This means that while shares may go up and down, if you ride the storm out there is a big chance your shares will come back to their former glory and go on to bigger and better things.
If you sell your shares when the market tanks, you are basically accepting a loss and actually losing the money for real.
I did this with some shares I held in Suncorp Bank. I purchased them when they were VERY high, only to sell them a few years after the GFC as they failed to rally back up. This meant I accepted a loss of $1.5K – had I of held onto them for another few years, they would now be back to their former glory and I would be $1.5K richer + holding shares in a company that pays me dividends.
Trying to trade frequently (day trade) to make money never works
Everyone knows someone who trades from home in their underpants and drivers a Ferrari. Well actually, I don’t – but the idea is awesome. The truth is, however, that day trading of shares is basically gambling. On top of this, you need to have so much money behind the trades that the risks far outweigh the potential returns.
Imagine if you lost all of your money on a trade? Much like gambling, you only ever hear of peoples wins – never their losses.
There is also a capital gains tax issue with day trading. Read about CGT and shares here if you are interested in how shares and their profits are taxed.
Buying shares in companies you don’t understand
You have to know what the business does that you are investing in. The business should be doing something that adds value to society and you can see a long-term future in.
Buying shares in a company that is hunting for gold is not smart. What if they find nothing? The key to long-term wealth is investing in shares that people understand, that you understand and that provide a long-term value to the customer.
People will always eat, drink, sleep and make money – what industries play in these areas I ask?
I once invested in Babcock & Brown, rivalled to be the next ‘Macquarie Bank’. I had no idea what they did. Had I of known, I may have found out earlier that they were going under and were actually a poorly run company.
Avoid any hot tips from friends and taxi drivers
If a taxi driver is giving you share market advice, run. Not saying they aren’t intelligent, they are no different to you and me, what I am saying is that by the time a stranger is giving you share market advice, the horse has bolted and if the tip was so hot – why are the still driving a cab?
The same applies to friends. Especially friends that have no idea about investing that all of a sudden have a passionate burning desire to share hot tips with you. Quite often they are simply propagating the share price to go up as they reel more people in to buy.
Not diversifying your portfolio is naughty
A common mistake people make with investing in shares is buying shares from the same industry. This means investing heavily in one sector, for instance; banking. Someone may love their banking stocks and buy Westpac, ANZ, Commonwealth Bank and more.
This creates a problem in that you have ALL your eggs in one basket. The best way to invest in shares is to diversify your portfolio by spreading the love between multiple industries that you understand. If one takes a beating, the other doesn’t. It helps you hedge out your risk also.