Two mistakes “new investors” make and how to avoid them
So, you’re a new investor and you’ve read just about everything about mistakes you could possibly make. You’re set to consider what investments out there are right for you, but first some wise words of warning….
1. Shop around
Don’t assume that those in the financial services business have your best interests at heart. Some are scrupulously honest, others are not. Banks and others are keen to get your money or hold on to it, and will tend to highlight the most attractive elements of their investments and downplay the drawbacks. So shop around for the best deals, and be careful to compare like with like – 10% a year is not the same thing as 10% monthly in advance. And an investment that locks you in for five years at a rate subject to change is a very different thing from one at a fixed rate, or one where you can cash in on short notice.
2. Nobody knows the future
Interest rates are affected by many imponderables such as economic growth, the exchange rate, government and Reserve Bank policy, political change and foreign investors’ attitudes. Even the experts can get it wrong, so financial institutions setting rates err on the side of conservatism and try to load as much of the market risk on to you, the lender, as they can. Be especially wary of those who speak with most confidence about the excellent returns you can get from unusual investments or conventional ones offered by businesses you’ve never heard of before.
Two fundamental points that you need to before you invest
Diversify your portfolio
Also important is that you diversify your investments, and not place all your hopes on just one or two. Things will go wrong with some sectors, some institutions and some products. Anyone individually or all of these could be severely impacted by, say, a national or global economic crisis. It has happened often in the past and will happen in the future. No matter how risk-free you may consider your investments, it’s not possible to always escape the backwash.
Come to terms with potential risk (no matter how minimal it is)
It’s furthermore all very well saying, “I’m totally committed to the lowest-risk products possible and I’m taking no chances”. Reality, however, is that most people are living longer, need more to survive, and are required to take at least some risk to maximize their returns within the parameters of their respective risk profiles. Any investment offering a higher rate than that on long-dated gilts involves some degree of risk, though the risk may be minor. You must judge for yourself what extra risk is involved to gain higher return, and how comfortable you are living with that additional risk.