7 investment mistakes to avoid in 2020

For 2020, consider brand-new investment strategies moving forward. 2019 was a pretty jittery ride with steep declines and plenty of nerve-wracking fluctuations for equity investors, as well as debt investors. Some may be well ahead of their wealth-building quest, while others have probably fallen short.

2020 is the beginning of a new decade. Remember to avoid making bad investment decisions (or sticking to bad investment habits). Financial milestones are often only as good as your ability to plan, so here are a few mistakes to take note of while you prepare for the future.

Exposing your portfolio to over-diversification

Diversification is typically considered a good thing when it comes to securing your investment portfolio. However, too much diversification can ultimately end up having the opposite effect. Don’t be too controlled by your emotions, because emotions can either lead to bad decisions caused by impatience and frustration or lead to over-diversification.

Stop trying to avoid even the slightest of risk to keep returns high because past a certain point, diversification only adds to costs. Similarly, diversifying in the same category (multiple mutual funds for instance) can land you in hot soup. Instead, focus on spreading out (equity, bonds, real estate, gold…etc.).

Relying solely on past performance

It’s important that you learn from your funds’ performance over time, as their numbers can reveal valuable traits that you can benefit from for future investments. However, investment decisions based solely on a fund’s past performance can ultimately harm your strategy. Patterns do exist and history can repeat itself, however, the rear-view mirror isn’t the only place you should be looking when you drive. Consider all other parameters including risk, the track record of your fund managers, and portfolio holdings(among other things) in order to try and get a clearer picture of what might be coming up.


Failing to build an emergency fund

Failing to fully secure your financial health as an investor can be a very careless (and costly) mistake. Costly problems that you didn’t expect or consider might spring on you like a lion waiting in the bushes. Expensive medical bills, huge auto repairs or sudden issues with your home can disrupt your financial flow. So, if you don’t intend to be left racking up debt to cover bills, set money aside and start building an emergency savings fund if you haven’t started already. There’s probably no point investing and building wealth if a pile of new debt is waiting for you at the end of every year.

Mixing investments and insurance

Investing and insurance may be equally important. However, combine the two and you could have a disaster on your hands. Mixing insurance and investment efforts might even end up solving nothing. You won’t have risk protection that’s optimized and you won’t be able to land effective investments too. Unit-linked insurance plans and traditional life insurance products often offer an investment and insurance combo, but these can be inefficient since they aren’t as flexible as mutual funds. These plans, like mutual funds, can’t switch from funds across the life insurers. On top of this, there’s a long lock-in period that might fetch a low surrender value if you withdraw your money before a specific period. Risk protection is much better when separated from investment, it’s a more practical and effective approach to financial planning.

Ignoring secular growth trends

In order to avoid low future returns, investors will often expand their investments with aggregates and indices, ignoring the specific secular growth trends. It may be time to broaden your horizons, especially if you take the automobile industry as an example(with contracted global auto sales in 2019 but 25% of growth in electric vehicle sales). It may seem like a bold move, but many analysts are confident that the electric vehicle industry is a rising one (along with software and e-commerce as emerging markets).

Choosing too many unsuitable investments

There’s more room for error when investors don’t lay out a clear financial plan. One of the more common problems they run into is opting for too many unsuitable investments since they aren’t sure about the kind of ROI and risk appetite they should be aiming for. If you invest in an ROI that’s way out of your league, you could risk losing all of your cash due to high volatility. On the other hand, targeting an ROI that’s too low could lead to slow growth and undesirable results. Plan diligently, and don’t forget to include diversifying your investment assets. Consider getting help from a financial advisor.

Not identifying promising growth and innovation

Sure, it’s a good idea to play it safe, dipping your cash into investment opportunities that offer slow but steady growth. However, there are companies out there that do innovative work, generating new services and products with huge untapped potential. As long as you’re careful, it doesn’t hurt to be a little adventurous, particularly if you consider that we live in an era of rapid innovation. Lululemon’s company stock has tripled in value over the last two years. It’s one of the pioneers of the “athleisure” fashion trend. Not every company can generate returns like that, but identifying the good pockets of growth that stem from innovative prospects is a skill that could be very lucrative.

Much like anything that’s worth pursuing in life, investing isn’t always easy or straightforward. You shouldn’t be discouraged though, as great learning curves often lead to great opportunities for success later on. Learning from common mistakes can be a great way to set yourself up for success over time. Consulting with a financial advisor would help clear the confusion. Our experts are available to help. Contact us today and schedule a call.

Hampton Wealth specialises in sourcing high quality, listed bonds and funds with a focus on providing returns in excess of normal off the shelf investment options.

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