Making the right investment decisions is probably the most important contributing factor that determines one’s financial success. Other things like how much wealth you have, what you do with this wealth, what’s your current income status and the like become secondary.
At the end of the day, what matters the most is not what you have, but what you do with what you have. Thus, knowing the right places to invest your money in is very important.
Many may think that it’s quite unlikely to make wrong investment decisions as there are many experts in the investing field who shall guide you through.
However, you must note that no matter how much experienced an expert is, at the end of the day, he’s a human and you still can get yourself in an unfortunate investment if you ignore the early red flags.
Also, what you do with your money at the end of the day is YOUR decision and many a time investors do not exactly follow what the experts are to believe.
When it comes to making investment decisions, many people rely on their intuitions over the logic and knowledge that they have and have still come out victorious.
So what should override what when it comes to making investments? Well, that’s very subjective and can vary from one individual to another.
There are successful real estate investors on both the ends of the spectrum – the ones who make decisions based on their intuitive perceptions and the ones who make decisions solely based on logic, experience, and knowledge.
What path you choose to follow is a personal choice as only you’ll know what seems to work best for you, of course, after a couple of trials and errors.
However, there are some bad investment habits which you must avoid to keep yourself at bag from making bad investments.
This blog is an overview of the 5 Key Things To remember to avoid making bad investments. Before we talk about these 5 Key Things, let’s first define the scope of bad investments.
What are bad investments?
It is difficult to pinpoint the exact type of investments and call them “Bad Investments“. There is no crystal clear answer or a way to determine outright what bad investments are. In a general context, you can say that any investment that’s subsequently performing bad and is leading to financial losses can be termed as bad investments. Investments that bring in subpar returns are called as bad investments in a general context.
Now, will you know whether an investment is going to bring in subpar returns at the very outset? No. Can you practice habits that will keep you away from getting yourself into such investments? Yes.
Totally. What’s the best way of doing that? By avoiding all the negative investment habits that will lead you into making wrong investment decisions and lose money in bad investments. So, here are 5 key things you should remember so you can avoid bad investments.
5 Key Things You Should Remember to Avoid Bad Investments
#1 – Follow the rule of averaging out your investments
Averaging out your investments means that you shall start investing in different types of investment opportunities available out there, by bringing in a system that will automate such contributions.
This means that regardless of how the market is fluctuating or how a particular stock is performing, you shall be able to leverage the average best of your investments.
It is a bad idea to put all your eggs into one basket and expect to have out-of-the-world results. Putting all your money into one single investment carries considerable risk and it could make or break your investing success.
Thus, try to spread across your investments over a wide range of Portfolio. Put it simply, diversify your investments and do not put all your money into a single type of investment.
#2 – Avoid investing in investments that carry huge surrender charges
Surrender charges are the charges you shall be required to pay when you want to stop investing. Done investments carry no surrender charges at all while some others carry huge surrender charges.
Try to avoid investments that carry huge surrender charges as they limit your flexibility to divest whenever you learn that these investments aren’t performing well.
Often, people find themselves in situations where they know a particular investment of theirs is performing bad but will hold onto such investments anyway by thinking about the vast surrender charges they’d otherwise have to pay.
It’s a great opportunity cost and you can instead divest and invest in other better-performing assets or properties instead of holding onto a bad one simply because you don’t want to absorb the extra surrender charges. Hence, it is a wise idea to exclude bad investments altogether.
#3 – Avoid investments that have limited marketability
There are investments that are very difficult to divest from than they are to invest in. These set of investments are called as illiquid assets.
Some of the examples of illiquid assets are private equity investments, private placements, and non-publicly-traded REITs. These investments generally offer for a great return at the end of the lock-in period and thus such investments may appear to be very lucrative.
However, it’s not one of the most deliberate practices of investing as with these kinds of investments, your liquidity of cash becomes very less and thus it might fail to cover you in a situation of financial crises.
The second reason why investing in assets that have limited marketability is not a great idea is that you cannot leverage on other better investment opportunities by quickly withdrawing your money and re-investing in better investments as these illiquid assets have a certain lock-in period.
#4 – Keep away from investments that you don’t understand
The next most important thing you need to make a note of to avoid bad investments is to avoid investments that you have a hard time understanding.
If you don’t exactly understand how a particular type of investment works, you should simply withdraw. Even a good investment can become a bad one when you’re making bad choices with what you’re doing with the investment. It is especially true for real estate investments.
Jumping into the decision of investing is very easy, but it can land you in a lot of trouble if you haven’t made an informed decision. Many a time, you might be having half knowledge about how things work.
In such cases, always first attempt to understand how things work clearly. Only after you are convinced about your understanding of the investment should you go ahead with the investment.
Another alternative could be to hire an expert who will do the thinking on behalf of you and make the right decisions.
But again, it’s a tricky deal because you don’t have a good understanding of the investment itself and it’s hard to judge whether someone is a real expert or not in the subject.
Thus, be very careful with the investments that appear to be confusing to you. The best solution would be to look out for other types of investments which you find easy to understand as there are hundreds of types and you can always explore!
#5 – Conduct regular portfolio reviews from time to time
Conducting a regular portfolio review helps you better understand how all your investments are performing. Adding this to your calendar every month allows you to check on the performance of the stocks and properties that you own and helps determine if these investments still align to your overall goals and plans.
Most importantly, conducting such portfolio reviews from time to time helps you understand if the investments are in alignment to your financial goals and which are the investments that you should divest from or which are the ones you should invest more in.
It will also help you make better decisions in the future with respect to choosing your investments. Thus, it’ll keep you from making bad investments by way of continuing with a particular type of investment that is not in alignment with your financial goals.
These are the 5 key things one should bear in mind in order to keep away from bad investments. Doing all of these might not guarantee that you make no bad investments at all but it’ll surely minimize the risks to a great extent.