Updated: February 28, 2020
Investing enables us to make money work for us, instead of just the other way around.
How hard that money works and how much it earns in the future, usually depends on our ability to make good and sound investment decisions.
That’s why it’s important not only to set aside money for investing, but also – hone our investing skills that will allow us to choose the best investments that will suit our financial needs.
Below are three mistakes that people often commit before and during investing; along with the things you can do to avoid making them.
Mistake No. 1: Investing without a SWAN fund.
“What’s a good mutual fund to invest in?” a friend asks me the other day.
I know he just got out of credit card debt so I was surprised to learn he’s thinking of investing in mutual funds. So I asked him how much money he has in his SWAN fund.
“SWAN fund… what’s that?” he asked.
“Your sleep-well-at-night fund,” I answered. “Otherwise known as your emergency fund, which is six months worth of your regular monthly expenses.”
Most people, when they finally get out of debt or come across a windfall, become too excited and make the mistake of immediately investing their money in instruments that are too risky for them.
Always remember to build your emergency fund first, before exposing yourself into any kind of investment risk.
Mistake No. 2: Investing without an objective.
A friend told me he wants to invest P50,000 in the stock market.
“Why?” I asked.
He said because he wants to earn money.
Then I asked him again, “Why do you want to earn money? What are you going to do with the money you’ll earn from the stock market?”
He was silent for a moment and then he told me, “So I could have more money to buy whatever I might need in the future.”
Are you like my friend? If so, then you’re investing without an objective – which is a mistake.
Understand that money is meant to be spent, and when you invest, it means that you want your money to grow so you can afford something that you want to buy in the future.
If my friend, for example, wants to buy an iPhone 5 when it comes out by the end of the year, then I’d tell him to just put the money in a time deposit because:
- His P50,000 is probably already enough to buy an iPhone 5 when it comes out. So no need to make it grow.
- Putting it in a time deposit would prevent him from spending the money before the iPhone 5 comes out.
By having a clear and specific investment objective, you’ll have a better gauge on the level of risk you can afford – which you can then use to determine the most optimal type of investment which you should get into.
Mistake No. 3: Investing solely for capital gains.
“I’m planning to sell my stocks,” a friend told me about a week ago.
“That’s right, the market is up and it’s a good time to sell,” I answered. “What are you going to do with the money you’ll get?”
“I’m planning to reinvest them in mutual funds and I’m keeping the rest for buying stocks again when the prices go down.”
“Sounds like a good plan,” I replied. “What about investing for passive income?”
My friend fell silent and analyzed my question. After a few minutes, he realizes the investing mistake he’s committing which I just pointed out.
Investing for capital gains is good for the financial future, but one should also invest to improve the financial present – something that passive income achieves.
We all know it’s important to live below our means, and if we want to improve our present lifestyle then we should find ways to increase our means.
Unfortunately, there’s a limit to what we can actively earn; thus the importance of having passive income.
By investing in assets that give regular cash flow; such as businesses, rental properties, and even dividend-paying stocks – then we are effectively increasing our monthly income.
When we have more income, then we have more money to spend, and ultimately – better means to enjoy life today.
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Photo credit: pascal v50