Investment is a tricky topic for individuals with limited financial knowledge. Sadly, this leads them to become targets of investment scammers. They’re swayed by claims like “I’ll make you rich in two months” or “Your $50 will become $500 within a year!” These grandiose claims damage the reputation of investing, making victims of scams avoid the activity – even legitimate ones – altogether.
Then some people know a thing or two about investing. But instead of growing their money, all they get are losses. Their goals aren’t met, not because of the market or the economy but because of their high expectations. They gambled their hard-earned money without studying the security or investment product. As a result, they’d make assumptions that investing is a mistake, and only the rich can afford it.
In truth, investing isn’t rocket science, and scammers are easy to spot. If your investments haven’t made you rich yet, perhaps your reasons were wrong.
Wrong Reason No. 1: I want to become rich quickly
Investment funds take time to grow. If you want to get returns quickly, choose short-term securities like treasury bonds. However, short-term means low-risk, hence lower returns. As such, short-term securities wouldn’t make you rich quickly either. But it grows your money all the same.
If a so-called broker approaches you and claims that your $50 will turn to $500 in a few months, don’t be fooled. That is too good to be true. If you give them your $50, chances are they’d run off with it, taking with them the money of the other people they’ve also scammed.
Right Reason No. 1: I have long-term goals
Patience is a requirement for every investor. A slow and steady approach to investment will yield greater returns. Expecting your money to grow instantly leads to nothing but disappointment, and sometimes, disaster. So unless you’re willing to wait ten, twenty, or even thirty years, go for short-term securities. But again, note that you can’t expect great returns from them.
Wrong Reason No. 2: The economy is booming
If you want to invest in stocks, a booming economy seems like a good time to start. With market values skyrocketing, you can expect high returns from your outlays. But investing only because of a thriving economy isn’t always a good reason. You can still invest during a recession and expect your money to grow.
Think of it as a housing market crash. When houses become cheap, people scramble to buy. When the market bounces back, prices go up, benefiting sellers. The same can happen to you when you invest during a recession, then trade your stocks when the market recovers.
Right Reason No. 2: Stable companies are worth investing in during a recession
Instead of selling all your stocks during a recession, keep them in your portfolio, especially the stable companies. Even during a recession, big corporations with a steady cash flow, low debt, and strong balance sheets tend to do well. Their stocks are called cyclical stocks. They are often tied to employment and consumer confidence. Examples of those companies are car, furniture, and clothing manufacturers.
True enough, during the pandemic, home renovations boomed, and cars went down in prices. Clothing sold well, too, with people changing their wardrobes for the work-from-home setup.
Wrong Reason No. 3: This company is so stable it deserves all my money
Buying stocks from a stable company can lead you to fall in love with that company. You’d think it deserves all your money since it has been doing a great job of yielding high returns. But remember, you’re buying stocks to make money. You don’t buy stocks to support a company. If any of the fundamentals that encouraged you to buy stocks have changed, consider selling the stock.
Right Reason No. 4: I don’t want to put all my eggs in one basket
This is classic investment advice. You shouldn’t put all your eggs in one basket because if that basket crashes, it’s going to take all your eggs with it. So even if you’ve been earning generous dividends from a single company, diversify your portfolio. Invest in promising startups, real estate, and other securities with lower risks. It’s important to strike a balance in your portfolio. You need both low-risk and high-risk investments (depending on your risk aversion level) because you’d never know when you would need emergency money.
Similarly, don’t put all your money in a single savings account. Open multiple ones and, more importantly, have emergency savings and insurance policies. This habit will ensure that you’ll always have money available when you need it.
Investing for the wrong reasons can also make you misinformed about investing. Hence, study the activity well first and be mentored by financial advisors. Don’t fall for grandiose claims and false promises.
Photo by John Kevin