Financial literacy is a life-long process. Along the road to financial freedom, you will have many tempting opportunities to invest and grow your money.
Here are a few investment options you should stay clear of:
1. Investing in something you don’t understand
Number one mistake tops them all! Don’t get trapped into buying something you don’t fully understand.
No matter how good a deal seems,never invest in any security without really understanding the risks and potential rewards fully. – Warren Buffet
Be especially cautious when bankers, stockbrokers, insurance brokers push you to invest in financial products. The brokers usually push the products which give them maximum commissions. Always insist on answers to all your questions and do the research yourself.
2. Keeping all eggs in one basket
Properly diversifying your portfolio minimizes risk and increases the chance of a return, even if the market takes a turn for the worse. Invest in various sectors and asset classes – stocks, ETFs, real estate, side hustles.
3. Judging investments by past performance
This goes for stock and for real estate.
Past performance is no guarantee of future results! – popular stock market advice
Example: After the huge market correction after the tech bubble burst, Lucent Technologies traded at around $8 per share. Many investors betted it would eventually work its way back up to its former worth of around $60 – $80 per share. Sadly, Lucent Technologies never rebounded and the investors wound up selling their shares for a loss.
4. Investing money you don’t have
The interest you pay on your loan is for sure. The gain on the investment is not. No matter how hot the deal is, don’t get tempted to invest borrowed money. You will start with a negative balance and you gotta work your way up paying the interest first and then hopefully making a profit. If the investment goes down, you will be in big trouble. Consider this a no-win situation for you.
5. Buying too large of a house
When applying for a home loan, you may qualify for a much bigger loan than you can afford. Financial experts recommend paying no more than 28% of your monthly paycheck to your mortgage. Additionally, avoid 30-year loan terms. They can cost you thousands of dollars in interest and keep you buried in debt much longer than is needed.
Better save for a down payment as much as possible and keep the mortgage amount and payment period to a minimum.
6. Considering your home as a safe investment
A house is a place to live. Purchasing additional properties beyond your primary residence to generate cash flow could be a worthwhile investment. However, the primary residence you call home, for which you pay the upkeep as well as property taxes, is certainly not something you should include in your retirement nest egg.
7. Making poor educational choices
Higher education is a terrific investment, but it can also leave you buried in debt. Depending on what part of the world you are, investment in education has varied ROI (Return on Investment). Consider doing an online degree or putting together an individual curriculum.
8. Going into business partnerships with close friends
A close friend or family member may have a great idea and ask you to invest. While the idea may sound good and the promise of return even better, be cautious. Look at business plans, ask questions, gather extensive research and bring in professionals before you invest in something confusing or risky.
Instead, offer to provide them with a low/no rent housing situation (if you have space) so they can live on very little income until their business gets going.
9. Buying into bubbles
Don’t believe that global growth is sustainable without knowing the underlying fundamentals needed to sustain markets.
If it sounds too good to be true, then it is too good to be true.
10. Buying a brand new your car
One of the worst investments people can make is a brand new luxury car. Buying a car is an investment in fun and convenience and not an investment you’re likely to make any money on.
Regardless of whether you buy or lease, chances are you’re throwing money out the window to enjoy the luxury of owning a car. As soon as your car leaves the dealer’s lot, it begins to depreciate in value. Leasing can actually make things worse since you’re paying for a car you technically have no vested interest in.
11. Investing in Collectibles
A lot of people fool themselves about the resale value of their collections and justify spending absurd amounts on their hobby by declaring their trading baseball cards, handcrafted dolls, art, coins, stamps, antiques or comic books an “investment”.
Unfortunately, many of these items may never appreciate or may not appreciate in the time frame they expect. To make any money investing in collectable items, you must have extensive knowledge of the item to know what will drive an individual to purchase the item at a high price. Furthermore, the item must be in high demand.
12. Investing in Timeshares
A timeshare is an arrangement whereby several joint owners have the right to use a property as a holiday home under a time-sharing scheme. You will need to cover annual fees and you have no control over their annual increase.
You should think of a timeshare purchase as a lifestyle purchase, not an investment. When you consider depreciation, travel costs and maintenance fees — on top of uncertainty of use — the concept of pre-paying for your vacations may not pencil out. Additionally, you are limited to a vacation at the same place at the same time every year.
13. Investing in Hedge funds
A hedge fund is when a group of investors pool their money together to gain capital. This investment is expensive and illiquid, meaning you can’t touch the money and withdraw for a certain period of time – typically one year. Additionally, when you invest in a hedge fund, there are numerous fees to be aware of, including performance and management fees.
It might sound overwhelming, but take it one step at a time. Soon enough you will feel more confident in making investment decisions.
What is the biggest investment mistake you have made? Post it down in the comment section below!
Image: by Xavier Sotomayor, header made Canva