Common Investment Mistakes to Avoid

Certain investment mistakes are typical and widespread. But if you can avoid these blunders, investing successfully and securely does not have to be complicated. This guide from moneyland.ch lists common investment mistakes.

Mistake 1: Investing money that you need

Investing money that are likely to need in the foreseeable future is the surest way to do yourself a disservice. By doing so, you put yourself in the uncomfortable situation of being forced to either sell your investments or get a loan in order to cover your expenses. It is important to have a budget that accounts for all possible expenses. It is also helpful to have an emergency fund for unforeseeable financial emergencies.

Mistake 2: Not having an emergency fund

Your emergency fund forms the basis of your financial life, as it ensures that you remain solvent even in times of financial difficulties. If an emergency occurs, you can fall back on your savings instead of having to sell your stocks or ETFs at a loss, or get an expensive loan. The money in your emergency fund should ideally be quickly and easily accessible. How much money you should have in your emergency fund depends on your circumstances. You can find detailed information in the moneyland.ch guide to emergency funds.

Mistake 3: Being greedy

It is important not to set unrealistic investment goals. If you have dreams of utopian returns, you will be more likely to take on way too much risk, and to experience major losses. Achieving returns of 10 percent per year, for example, is difficult, and requires taking high risks. Inexperienced investors, in particular, should stick to more realistic goals. The historical return calculator on moneyland.ch can help you find out what a realistic return looks like, from a historical perspective.

You should also avoid letting greed push you to invest in just a few assets that promise high yields, instead of properly diversifying your portfolio. Never put all your eggs in one basket, even if that asset has yielded high returns in the past.

Mistake 4: Being short-sighted with regards to investment terms

Diversified investment portfolios normally reach their full potential over long periods of time – many years or even many decades. A look into the past shows that while the stock market shows high volatility and fluctuations over shorter terms, over long terms it has almost always yielded substantial returns. In order to avoid the temptation to sell your assets when markets crash, you should only invest money that you will not need in the foreseeable future.

In principle, having a long-term investment horizon is also beneficial when using interest-bearing investment vehicles like savings accounts and medium-term notes. This allows you to maximize the compounding interest effect.

Mistake 5: Using actively managed mutual funds

It may sound very lucrative: Having experts actively manage a fund’s investments in order to outperform the stock market as a whole. Banks often recommend actively managed mutual funds as a profitable investment, using glossy brochures to lure prospective investors.

But the marketing conceals the fact that mutual funds rarely deliver higher yields than passively managed funds like exchange-traded funds (ETFs). Another disadvantage that is often overlooked amidst the flood of marketing for mutual funds by banks and insurance companies is that actively managed funds typically cost much more to use than passively managed funds.

Mistake 6: Only investing in a few stocks

Having a diversified portfolio is essential. If you limit your investments to just a few stocks or other assets, you are exposing yourself to the highest possible risk of loss. While it is theoretically possible to achieve very high returns if you happen to pick the right stocks, betting on just a few companies also has the potential to bring you huge losses. Investing in individual stocks can only be considered secure if you divide your capital across a broad array of different companies in different countries and industry sectors. ETFs provide a simple way to invest in a diverse portfolio of assets even if you can only invest small amounts of capital at a time.

Mistake 7: Not taking advantage of potential savings

Money that you spend on expenses is not available to invest. That is why it is important to use every opportunity to pay less for things like insurance, telecom plans, your bank account, and your stock brokerage account. The moneyland.ch comparisons can help you find the cheapest offers for your needs. You should consider whether you really need all of your paid subscriptions. For example, if you do not actually use your gym membership, there is no reason to continue paying for it.

Mistake 8: Falling for social media marketing

Always be skeptical when someone promises quick investment returns. Social networks, in particular, are a hub of supposed investment experts and self-made millionaires trying to pawn off dodgy investment products. Be especially wary when advertisements misuse celebrities or established media brands. These dubious investment services are best left alone.

Mistake 9: Investing too much money in cryptocurrencies

Putting all your eggs in one basket is never a good move for investors. That holds even more true for cryptocurrencies, with their exceptionally unpredictable and volatile prices. Along with fast gains in a short amount of time, cryptocurrencies can also bring sudden price collapses or even a total loss. Cryptocurrencies like bitcoin can be used as an optional alternative asset to diversify your portfolio, but they should never serve as the basis of your investment strategy. An even safer option is not to view cryptocurrencies as part of your investments, but simply as a game in which you only invest easily-disposable money.

Mistake 10: Speculating using leveraged products

Keep a safe distance from leveraged trading products, as the risk of losing money with these is very high. Leveraged trades make use of loans to cover part of the investment. If trades go against you, you can quickly lose all of your capital, or even have to add more money to repay the loan.

Forex trading – investing in currencies using forex pairs – generally makes use of leverage. When you trade forex pairs, you speculate that one currency will gain value over a different currency. Because it is impossible to accurately predict developments in currency values, trading forex is very risky. Inexperienced investors in particular should not expose themselves to that level of risk.

Mistake 11: Using investment products based on life insurance

Mixed life insurance combines term life insurance with permanent life insurance that builds cash value. Using cash-value life insurance to invest almost never pays off for you as the customer. Compared to other investment products, the fees and charges are generally very high, and the products themselves are often complicated and not very transparent. Additionally, investment solutions based on life insurance are usually very inflexible, with insurance terms that may span many decades. Terminating a policy ahead of schedule can result in substantial losses.

If you do not want to invest your money on your own, affordable online asset management services are a cheaper and more flexible solution.

Mistake 12: Investing too much money in tangible assets that are hard to liquidate

Tangible assets like watches, wine, or whisky can be a sensible addition to your overall investment portfolio, as long as you possess in-depth knowledge of these products and their markets. But investing all of your capital in tangible assets is not a good strategy. For one thing, there is no guarantee that they will gain value, and major losses cannot be ruled out. For another thing, markets for tangible assets generally do not have nearly the same liquidity as markets for other assets like stocks and ETFs. Finding buyers when it comes time to sell your assets can be difficult and take a long time.

Mistake 13: Using investment products that you do not understand

There are numerous investment solutions that are very difficult for inexperienced investors to understand. Structured products – which often combine stocks, funds, commodities, and derivatives – are just one example. These products are relatively complex, and often have a higher investment risk. The rule of thumb: Only use investment vehicles if you understand what they are, how they work, and how much risk is involved.

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