When you immerse yourself in the world of money and investing, you begin to realise not everyone knows what they’re talking about, and there’s a lot of noise and misdirection you need to swim past and mistakes to make and overcome.
We’re here to help you fast-track your journey a bit by sharing some of the things to avoid that we’ve learnt from our own experiences. In this episode, Kate Campbell and Owen Rask discuss some critical things to avoid on your personal finance and investing journey.
10 things to AVOID in the world of finance
Not investing enough time into your financial foundations
You’re already avoiding this mistake by listening to this podcast, so it’s an excellent start! But don’t stop here. Make sure you schedule time into your calendar each week to work on your finances and understand the basics.
Get rich quick schemes
Building on the importance of the first item on this list, by understanding how the world of money works, you’ll start to work out what’s realistic and what’s, shall we say, too good to be true. Yes, investing involves risk, but you don’t want to amplify this in investing in something that’s at best, not going to live up to its hype, at worst, will evaporate your money.
Charismatic salespeople and talking heads
When you start looking online, it can seem like there are a lot of money experts out there, but take it from us, many of these people are successful because of their confidence, not for their success rate. Many of the best investors we know keep a low profile, will talk in a more balanced way about their investments (which doesn’t make for a good headline) and don’t purport to know everything.
Remember, when it comes to investment experts, confidence doesn’t necessarily equal competence.
Making decisions based on your emotions
Another big thing to avoid, although it’s much easier said than done, is making split-second decisions based on how you’re feeling on any given day. While part of this is solved through education and having a plan, it’s tough when you’re a new investor to work through all the emotions you feel riding the ups and downs of the share market.
How can you manage this better? Stop looking at your portfolio every day, remember WHY you’re investing and zoom out to look at how the global investment markets have performed over the past 100 years.
Getting too passive with your passive investments
There’s a lot of talk online about the power of passive investing and passive income, where you make money while you’re sleeping and don’t have to worry about anything.
However, while you can build a great low-cost core portfolio that doesn’t require daily maintenance, it’s important to check in occasionally to ensure you’re receiving dividends, rebalancing (if required), staying on top of tax obligations and continuing to make progress towards your financial goals.
Concentrating your portfolio in one single industry, asset class or country
Having a concentrated portfolio is a big risk, even for the experts. So how can you avoid this?
Expert thinker Shane Parrish notes that ‘when failure is expensive, it’s worth investing in large margins of safety’, which is very applicable to our finances. Getting out of expensive debt, having an emergency fund and diversifying your portfolio are all factors that increase my margin of safety when making long-term investments.
Chasing income at the cost of growth
From time to time, we get asked about the investment opportunities in high-yielding shares or ETFs that are paying out significantly more in dividends each year than their peers. This can be alluring, but it’s not always what it’s cut out to be.
Make sure you’re not investing in a high-yielding share (to the detriment of the company underneath, and consequently, your investment falling in value) or an ETF/fund (that’s basically eating itself).
Making & collecting too many investments
Most investors spend their lives being a ‘collector’ of investments. One month you’re buying XYZ Company Ltd stock; the next, you’ve invested with ABC Global Fund. At the same time, you’ve been shovelling cash into an investment property and maybe even dabbling in that ‘great new idea’. A few years pass, or a decade or two later, and — presto! You’ve got yourself an unwieldy collection.
You are now, The Collector. From an admin perspective being a Collector is a nightmare. But from an emotional perspective, it’s more than a headache. The easiest way to stop yourself from being The Collector is to have a plan. It doesn’t need to be complicated.
Consider making a Google Doc to answers questions like these:
- What’s my long-term financial goal?
- What is my investment strategy?
- What will I invest in to achieve my goals?
- How will I manage my tax?
- How many positions will I hold?
- When will I rebalance?
Store your document in a safe place, and make it password-protected, for later use.
Falling into a comparison cycle
Once you start having money conversations, you might face some thoughts and feelings you didn’t expect, and it’s easy to fall into the trap of comparison. For example, in having these conversations, you might find out that someone you know earns three times what you do, received an inheritance or is in credit card debt, and it can be easy to start benchmarking yourself against them.
But it’s a trap.
Don’t let comparison steal your happiness. Your journey is your own. Use these conversations instead to learn to gain a greater understanding of how your friends and family think.
Trying to copy someone else’s investment goals and strategy
Finally, try and avoid copying and pasting someone else’s investment goals and strategies. It’s important to spend time working out your priorities and goals, which will help inform the portfolio you build.
You need to feel ownership of your financial plan, as this will help you keep going even when it’s hard and markets feel volatile.