Avoiding Bad Investments-
Investing can be scary and confusing. You may be dealing with someone who has a conflict of interest with what they’re selling, but you don’t want to miss out on what seems like a great opportunity — even if you don’t fully understand it. To ensure you have a good investing experience, here are 10 tips to avoid bad investments:
1) Do Your Homework
You shouldn’t blindly trust salespeople. They have a job to do. Spend time researching each potential investment. The Internet provides excellent resources for finding information on investments you may be considering.
2) Ask Around
Don’t hesitate to have a casual conversation with a trusted friend about a potential investment. Your friend could keep you from making a mistake.
3) Know What You Own
Warren Buffett has a reputation for knowing a thing or two about investing, and he will not buy anything he can’t understand. He invests in companies like Coca-Cola and American Express because he can understand how they make money.
Invest Gradually Over Time
Avoid investing all of your money at once. A beneficial feature of 401(k) plans is that you automatically invest the same amount every pay period. The concept is known as “dollar cost averaging”, allowing you to buy more when the market is lower and buy less when the market is higher.
4) Know Your Tolerance for Risk
Bad investments can cause you to lose sleep. Your greatest asset is your ability to earn an income. If you can’t sleep and you’re worried about your investments, you won’t perform your job at a high level.
5) Stay Liquid
If you have trouble getting out of your investment because you can’t find any buyers, you’re stuck with it. In a strong market, you can name your price. In a weak market, when you’re trying to get out, you’re at the mercy of the buyer. Some investments like Real Estate are by nature less liquid than a publically traded stock like IBM or Apple. Likewise some stocks are “thinly traded” meaning that there may not always be a buyer available at any given moment (or day).
6) Understand the Penalties
Some investments like certain mutual funds, annuities, insurance products, etc. require a holding period, and investors could incur a fee for selling an investment before that term ends. Avoid putting money in these types of investments if you might need the money before the holding period ends.
7) Give It Time
Don’t give up on an investment too soon. You can’t control the stock market, and what looks like a bad investment today could end up being a great investment tomorrow. If you did your research, trust in your decision.
8) Limit Your Losses
This is the converse of number 7. Holding losing investment or even just holding investments longer than you should, even if their value stays the same, prevents you from investing your money elsewhere. Save yourself from a bad investment by knowing when to get out. All successful investors have an exit strategy in place should things go bad. For some it is as simple as a “stop loss” that will get you out if your investment loses 20% or 25%.
9) Don’t Bet the Farm
Avoid investing more than you can afford to lose. Some risks are worth the reward, but if you are left with nothing, or if you’re forced to borrow to cover your failed investment, you’ve made a bad investment. See: Risk Management- The Key to Safe Trading for more information.
10) Diversify Your Holdings
Mutual funds are popular because they are diversified. Avoid putting all of your eggs in one basket so that you can reduce your risk of making a bad investment.
Sometimes you don’t know you’ve made a bad investment until it’s too late, and some factors are out of your control. Reduce the risk of making a bad investment by asking the right questions and using common sense. These tips should improve your chances of making more good investments than bad ones.
See Also:
- Risk Management- The Key to Safe Trading
- Buying Stocks and Bonds?
- Investing in a Mutual Fund
- What A Simple Price Bar Can Tell You About A Market
- Become a Better Trader: Know Thyself
- How Do I Start Investing in Stocks?
- Investing for Retirement
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