Investing is relatively simple, however there are a number of common mistakes that people make over and over again that cost them dearly. I call these the 7 deadly investment sins.
Common Investment Mistakes
Investing Sin 1: Failure to diversify – as they say ‘don’t put all your eggs in the one basket”
Investing Sin 2: Timing – trying to determine when the next stock market crash will happen is impossible. Remember the saying ‘It is time in the market (read: patience) rather than timing the market (read: speculation) that matters’
Investing Sin 3: Borrowing to invest – borrowing substantially increases the level of risk. Whilst debt is not sinful, it is something that Christians should get out of as soon as possible. Borrowing to invest is unnecessary.
Investing Sin 4: Unrealistic expectations – learn what is a realistic rate of return for the type of investment choice. Understand the time it would take for that investment to achieve that type of return.
Investing Sin 5: Impatience – one of the primary reasons for underperformance is impatience, which tends to lead to certain behaviours, such as excessive trading (buying/selling) regularly rather than just holding onto an investment. Excessive trading lows returns through transaction costs and increased taxation liabilities.
Investing Sin 6: Greed – holding onto an investment that has already done well, with the expectation that because it has done well then surely it will continue to do well and more money will be made!
Investing Sin 7: Failure to correct a mistake – investing is a humbling experience even during the best of times. If you make a mistake, learn from it, fix it and put in measures to prevent making the same mistakes again.
Here are two principles to consider to help you become a better manager of the capital that God has entrusted to you.
One: Preservation of Capital
Money takes time to accumulate, but is very easy to lose. The rules of investing according to the world’s most recognized investor, Warren Buffett:
• First Rule: “Don’t lose money”
• Second Rule: “Refer to the 1st rule”
Before purchasing any investment consider the potential loss of capital. What is the risk?
Two: Harness Compound Interest
Compound interest is simply earning interest on both the principal and previously earned interest; that is, earning interest on interest.
“Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t pays it.” – Albert Einstein
Compound interest simply requires the combination of time and regular savings. Why not start today?