Young investor? Then avoid these 5 pitfalls!
Do you have some money aside and want to start investing? Then there are several pitfalls to avoid. We will list them for you and give you tips on how to build your portfolio wisely!
1. Investing all your savings in risky assets
You do not need an enormous amount of money to start investing. Sometimes it is better to start small and learn from the successes and the failures before putting more money into it. Everybody can make a mistake in the beginning and, like everything in life, investing is also about trial and error.
Also, invest with a goal in mind: do you want to generate a little extra income to spend or do you want to grow your wealth sustainably over the long term?
Important is not to invest all your savings right away, but to start with an amount you can miss or do not need quickly. Keep some cash for unforeseen expenses, because you want to avoid selling investments at inappropriate moments and lose money unnecessarily.
2. Not knowing your risk profile as a young investor
Everyone has a risk profile, determine what is yours! You have to take a risk to generate a return. However, the question is: to what extent you are willing to accept the effects of ups and downs of financial markets? Are you panicking when your assets go down with 5%? With 10% or 20%? Because in general, people are more sensitive to downfalls: they feel that a 5% positive return is reasonable. At the same time, they think about selling all assets when their investments fell with 5% in value. The goal of determining the risk profile is to fix the balance between return and risk that is perfect for you. Once you have that profile, align your investment to it … and stick to this.
3. Putting all your eggs in one basket
You often hear: diversification is vital. If you strongly believe in the potential growth of shares from a particular company or industry, then perhaps you will put all your money into it. Suppose you invest in a biotech company that put his entire R&D into finding a vaccine for the Coronavirus. The first test results were positive. But all of a sudden, the researchers find out that there is a glitch in their test results. The stock price will go down, and if that is the only stock in your portfolio, you are in trouble. Spreading or diversification is therefore one of the essential principles of investing.
A sensible portfolio diversification not only means investing in different asset classes - equities, bonds and various sectors - financial, telecom - but also in different geographical regions: Europe, America.
4. Copying decisions from other investors or blindly following trends
What works for another investor may not work for you. So, the success or loss of someone you know should not influence you. Perhaps they invest with a different goal and might have a completely different investor profile than yours.
That is why you should never blindly follow all trends. When many investors buy the same share at the same time, its value can suddenly arise. Nevertheless, this is not necessarily the result of good operating results, but of that massive purchase that unnaturally pushes the price up. If a well-known investor suddenly invests in a particular share, many average investors follow this decision without thinking. Furthermore, that is not always a smart move either. Alternatively, there may be bad news, sometimes only based on rumors, causing panic. As a result, shares are sold en masse, and the markets collapse undeservedly.
So always decide for yourself, make choices based on your thinking and do not be guided by trends, well-meaning advice from acquaintances or the behavior of large investors.
5. Undervaluing the importance of financial knowledge
Many new investors are all too often insufficiently aware of how things precisely work in the financial markets, what the characteristics of the various investment products are, or the possible risks and returns. If you do not value the importance of financial money, it is better to take your money and throw it away in a casino. If you want to start investing, educate yourself. All of us do not need to obtain an MBA in finance. Just start with reading financial newspapers, attend the Art of Finance master classes that Degroof Petercam organizes, or follow us on LinkedIn. There you will receive feeds about macro-economic trends but also analysts’ views on stocks and markets. However, if you do not have the time for all this, and if in the end, the investment world is too complicated, you can call on an expert who can duly assist you.