“Where should I invest?”
The question on where to invest our hard-earned money is a popular one. But the problem for many people is not where to invest but how (not) to invest. So even before you start thinking about which stock, bond, mutual fund, or real estate project to invest in, consider these five common investing mistakes:
#1. Not investing at all.
Maybe it’s procrastination. Or you’re too busy. Perhaps, just like with most people, you always run out of money at the end of the month. After all, there are bills to pay (and clothes to buy!). Or you may be overwhelmed (and paralyzed into inaction) after knowing how much you need for retirement.
Why? One word: inertia. It does take commitment and some hassle to invest. You have to analyze, open an account, submit requirements, withdraw funds, etc. There is also one more problem. A bird on hand is worth more than two in a bush. The thing is you prefer instant rewards (hey it’s on sale!) over future benefits.
So how do you overcome this? You really need to make a plan to invest. You have to set your goals, make a decision, and take action. Like with any kind of goal, there are no shortcuts.
#2. Not investing regularly.
Okay, maybe you were compelled to invest during a seminar or after reading an article. And then what? You forget, you get too busy, you go back to old habits, or you ran out of money to invest. Well, do you know that you are more likely to come out ahead if you invest small amounts of money on a regular basis, say monthly, than investing a lump sum one-time (unless you’re good at timing the market, which is hard)?
Once again, it takes effort to set aside money to invest every month or quarter. The best way to combat this is to automate your investing, so you don’t have to think about it. Some investment companies, banks, and stock brokerages can automatically debit a fixed amount of money from your bank account and place it in your investment fund or stock of choice. Insurance companies give you a schedule of fixed premiums which you have to “pay” just like any bill.
#3. Not investing enough.
The problem with many people is not that they have no money to invest but that they chase after unrealistically high returns, so they end up getting burned. Instead of obsessing over which investment has the best return, focus on increasing how much you can invest. Studies have shown the amount of money you invest has a much greater impact on your portfolio than rates of return. After all, which is better – 8% on P100,000 or 30% on P10,000? You end up more even with “just” an 8% return because you invested more. Plus you took on much less risk.
Rather than getting blinded by fantastic returns, divert your energies to set aside as much as you can for investing, whether it’s by cutting back on discretionary expenses or increasing your income.
#4. Not investing properly.
There is a reason why the correct answer to the question “Where should I invest my money?” is “It depends.” People make the mistake of looking what to invest in before considering important factors like investment goals, investment horizon, and risk appetite.
If your goal is to retire, placing your money in bank deposits won’t help you reach it. On the other hand, if you need to save up for a planned vacation in two years, it’s not a good idea to invest in equities, which are designed for long-term goals. Also, if you can’t handle the roller coaster ride of the stock market, maybe you should instead put your money in something you have more control over, say a rental property or a small business (or stick to investments with guaranteed returns, like whole life insurance and long-term time deposits).
#5. Investing too soon.
Ideally, you should have invested when you were a teenager. The reality is most people think about investing when they’re a lot older. But it may also be a mistake if you invest too soon. What do I mean?
Consider your overall financial picture. If you are carrying credit card debt or personal loans that charge 42% a year, it doesn’t make sense to invest in a mutual fund that averages 20% returns a year. Pay off your debt first! If you don’t have adequate insurance, particularly life and health insurance, you are better off making sure you and your loved ones are protected. If you don’t an emergency fund, build that up first. Set up a solid financial foundation even before thinking about investing. You can always catch up.
