If you are a novice and not sure where to start with investing, please ask me. I would rather give you general advice and guidance free of charge than know you have charged ahead and lost your money.
Meanwhile, read on and learn about THREE INVESTMENT SCREAMERS that can cause a lot of financial pain.
- Speculating v Investing
- Borrowing to Invest
- Investing only for a tax deduction
Avoiding these three (3) fundamental investment traps will help get you on the path to long term responsible investing and creating long term wealth.
Speculating v Investing
You get a hot tip from a friend and want a piece of the action. You do absolutely no research and put your money on a ‘sure thing’ underpinned by nothing but hope and faith. So many people do this and get into trouble by throwing money at money-mirages. This is not investing; it is speculating, a very dangerous practice.
Borrowing to Invest
This is widely accepted as a traditional investment strategy, so what could possibly go wrong with making an investment using someone else’s money? Over the years, I have seen so many people get badly burned doing this – even when buying real estate. Borrowing to invest can appear attractive when market values are rising and interest rates are low, but what goes up always comes down and vice versa. The financial pain comes when markets turn and the value of the investment drops below the amount borrowed. Years after the GCF, many people are still stuck with ‘white-elephant’ investments and will be repaying very real loans for years to come. So the moral of the story is that markets are cyclic so plan ahead for changing market conditions.
Investing only for a tax deduction
The very first rule of ‘Investment 101’ is that if you are investing solely for a tax deduction, you are investing for the wrong reasons. You only have to look around and see how many promoters of tax-effective agricultural investments are still around. There is a big difference between investing for a tax deduction and responsible investing with an understanding of the applicable tax rules.
The reason I am pointing out these common traps is that it is easy to inadvertently slip into all three traps even when buying real estate. It is a popular myth that if you buy property you can’t go wrong.
It can go very wrong and often does, mostly because investors become blinded by distractions other than the core quality and true value of the property being purchased, and the real risks surrounding the investment. Risk is commonly underestimated because of the popular misconception, “It can’t be that risky if everyone is doing it, right?” Wrong! There is risk with every investment, and when you borrow money, your risk is multiplied. Know this before you start.
Your investment focus should be on research and asset quality. You should have a realistic view of all of the risks involved for the return you expect. Always understand your market and the true value of your purchase. Do your sums, know your limits and align your investments with your own innate attitude to risk. In other words, invest in a way that is not going to keep you awake at night.
This is general advice and educational information only, designed to increase your general knowledge of investment. As a financial adviser, I strongly urge you to seek professional advice before making any decision about investment or before making a major financial commitment. As this article suggests, there are many investment choices and which investment is appropriate for you depends entirely on your goals, individual needs and circumstances. Please contact me for personal investment advice.