How to Make Investing Decisions

How to Make Investing Decisions

?“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” – Robert G. Allen

Investing wisely is the key to financial success – saving alone will not enable you to attain your dreams.

Investing is committing money in order to earn a financial return. Ideally, you invest money to make more money to use to achieve your goals.

It is important to understand that money in itself has no intrinsic value; it’s worth is measured by what you can exchange for it. Therefore, investing just so that you have additional money is an incomplete goal that comes from lacking a healthy wealth mindset . Determine the life you want to live and invest to achieve it.

To assist you make well informed investment decisions, I will cover: Common Investment Mistakes to Avoid, Signs an Investment Opportunity May Be a Scam and How to Select Appropriate Investments. The article may be a bit lengthy, but I hope its worth the long read.

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Common Investment Mistakes to Avoid

By learning what to do and what to avoid when it comes to investing, we will equip ourselves with the skills to confidently begin to successfully invest.

Let’s begin by looking at some common mistakes people make when making investment decisions. Be aware, and try to avoid doing the following:

·????????Trusting fully on your emotions to guide you: This is not to say that you shouldn’t trust your instincts. ?What I mean is don’t base your decisions on your emotions only. Have facts to validate your preference. Research to find out if your feelings about an investment may be due to incomplete or false information you have about it, or because you have a clear bias towards it.

·????????Following the crowd: This often occurs when there is a new investment fad in the market. We find it easier to do what others are doing rather than basing our decisions on our personal risk appetite and goals. Additionally, we sometimes find ourselves joining the bandwagon because we tend to believe that if many people believe a thing, it must be true. It’s a dangerous habit, and often leads to loss and disappointment.

·????????Not doing enough due diligence: You need to do your homework on any investment you are considering. Investigate and verify any and all information relevant to an investment decision. Research its past performance, its legality and confirm it is regulated by the appropriate authorities.

·????????Not understanding the investment: Avoid investing in products whose structures and workings you don’t understand. If, even after researching the investment, it doesn’t fully make sense to you, avoid it. It is critical that you fully understand any investment option you're considering, including what it is, what the risks are and how the investment makes money.

·????????Choosing investments based on recent performance only: This is where, for example, a company announces a very high return for their last quarter, and we immediately have the urge to invest there. This bias is very common in investing because we are wired to give more weight to recent information rather than considering the weighted average. With investments, you need to consider the overall performance over a longer period of time and not fixate on a single result.

·????????Lack of patience: This is where we expect quick returns and get disappointed with the performance of our investments. This often leads us to either withdraw from our investments every time there is a spike in the returns or to invest in products that promise high short-term returns. Investments do best when they are allowed to compound; you also need to keep the cost of withdrawal in mind.

·????????Avoiding investments due to loss-aversion: Loss-aversion is whereby we tend to prefer avoiding losses more than we prefer obtaining gains. This is a bias most people have because we feel the pain of loss to a greater degree than we feel the pleasure of making a profit.

·????????Failing to diversify: As the adage goes, don’t put all your eggs in one basket. No matter how great an investment is, you should not put all your resources in one investment product and/or investment class.

Being aware of the possible errors we could make is a step in the right direction. Create the habit of making deliberate investment choices.

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Signs an Investment Opportunity May Be a Scam

Investing can be scary. We have all heard stories of people losing vast amounts of money to one scheme or another, and this thought often hovers in the back of our head when we want to make an investment decision.

In our eagerness to start making returns as soon as possible, we may sometimes find ourselves knee-deep in the latest investment scam. Or, sometimes we don’t think to question the legitimacy of an opportunity because it is introduced to us by friends or family. So how can we determine what is legitimate and what is a scam?

Some red flags to look out for when you’re being offered an opportunity are:

·????????Extremely high returns at low or no apparent risk. Be suspicious of anyone who guarantees the performance of an investment. All investments carry some degree of risk.

·????????The use of pressure tactics such as claiming the opportunity is available for a "Limited time only!” You should never feel pressured into making an investment decision. Even when it is a legitimate investment, take your time.

·????????Seemingly very complicated investment structures and difficult to understand procedures. Avoid anyone who is pitching an overly complex investing technique or product. It is critical that you fully understand any investment you're considering.

·????????You get offered commissions or additional gains for “recruiting” other people to the product or the scheme.

If it seems too good to be true, it probably is.

Do not let your eagerness for quick and high returns lead you to falling victim to scammers. Be vigilant and focus on slow and steady investing instead of making decisions based solely on promised returns.

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How to Select Appropriate Investments

“On average, millionaires invest 20% of their household income each year. Their wealth isn’t measured by the amount they make each year, but by how they’ve saved and invested over time.” – Ramit Sethi (I Will Teach You to Be Rich)

In order to financially succeed you need to practice goal-oriented investing. Here are the things to consider when selecting your investments:

·??????????The investment’s time horizon. You need to have investments that match your short-term, mid-term and long-term goals. For example, fixed deposit accounts or money market funds may be appropriate short-term investments that can satisfy short-term goals such as building an emergency fund or next term’s school fees; bonds or balanced mutual funds may be appropriate middle to long-term investments that can satisfy a middle-term goal such as paying a deposit for a home or planning for your Masters’ degree; A Pension scheme or real estate would be appropriate investments for a long-term goal such as post-retirement income.

·??????????Liquidity. That is, the ease with which an investment can be converted into cash at a reasonably stable price. This is especially important for short-term goals.

·??????????Risk. You need to be aware of the risk and return of your investments. The higher the return an investment promises, the higher the risk associated with the investment. Does the risk match your risk appetite?

·??????????Compound growth. Compound growth occurs when the return on an investment is added to the principal amount invested for the next period. Are you taking maximum advantage of compounding? If you consistently keep reinvesting all your returns, your investments will grow at a faster rate. For long-term investments, this compounding phenomenon is especially important.

·??????????Active vs Passive investing. Active investments require your consistent involvement and input. This is an investment such as a business (and by the way, investing in the stock market is supposed to be active, but I’ll go into that in a separate post). Passive investments are often managed by professionals and include mutual funds (money markets, equity funds and balanced funds), pension funds, SACCO’s, etc. For most employed individuals, your best bet is to go for passive investments because a lot of your time and energy goes into your job. We all know of someone who has gotten burnt by attempting to run a business or farm remotely. Yes, there is an opportunity to make a good return in this way, but the risk is extremely high.

Investing is the key to growing wealth, and if I had to give you one piece of advice regarding investing, it would be, START NOW. No matter how little you have to begin with.

Investing is very much like planting trees; as the Chinese proverb goes, “The best time to plant a tree was 20 years ago; the next best time is now.”

If you would like to find out more about how the Thrive One-on-One Coaching program can assist you invest appropriately to meet YOUR goals, book a free 30-minute ZOOM call with me HERE .?