THE EIGHT GREAT MISTAKES THAT INVESTORS MAKE
1. Over Diversifying – Yes, you do want to diversity so your “eggs aren’t all in one basket.” But you do not want to spread your money so wide that it is difficult to monitor
2. Under Diversifying – Just the opposite, if you put all of your money in three funds, and one does poorly, the other two will not have enough spectacular returns to make up for the difference
3. Euphoria- Some investors have their head up in the clouds much of the time and think nothing can go wrong. They may need a dose of Murphy’s medicine. If something can go wrong it will!
4. Panic- Many investors are in this mode right now. All you have to do is take a look at your 401K statement and it can set you to panic mode. You must ignore that negative return and look at the big picture. Dollar Cost Averaging in equities always will win in the long run. Just keep putting in your $50 or $100 or whatever you can afford each month regardless of the price, and over the long run your average investing will win. If you panic and pull your money out at the worst time, you may indeed have a real loss, not a paper one. A heart attack may not be far behind.
5. Speculation – Many investors want to build new streams of income but they may jump at very risky online advertisements. Ecommerce can be a good opportunity to build future income, but you must carefully research the background to see if it’s worth even considering. Most online ads are not worth your time
6. Investing for Yield (dividends) instead of total long term return – In the short run yield returns will be moderate, taken over a long term horizon with a carefully planned strategy will bring about the result you are seeking
7. Letting the cost basis dictate your investment decisions – the cost basis is typically the upfront money you put into an investment. It is on the back end where appreciation is realized, and that takes time and prudent watchcare
8. Leverage-this is a huge word and can be your friend. We are all familiar with the example of investing $10,000 to buy an investment property worth $100,000. You might clear $500/mo from the rent it produces, after paying all of your expenses. That would be $6,000/yr which is a 6% return. As that investment appreciates you will realize a potential large profit. If you use leverage you would pay $10,000 to buy the same $100,000 building. Your annual rent profit may only be $100 per month. But that $1,200 annual rent profit represents a 12% return on your smaller $10,000 investment, twice as much! Then suppose you sell the property a yr. later for $110,000. That $10,000 increase represents a 100% return on your investment. You double your money in a year! Now suppose you invest $10,000 in 10 properties that are worth $100,000 each. Now you control $1,000,000 worth of Real Estate Investment and as it appreciates it can build you wealth in a hurry. However leverage can be a two edged sword if the property significantly drops in value, and increases your leverage losses. The point of course is to find the right balance and use leverage in a smart way!