Alternative Investing with MyConstant ep.8: 5 common mistakes investors make (and how to avoid them)
There’s no perfect blueprint to follow when investing, but there are certain mistakes you should try to avoid. On this episode of Alternative Investing, we discuss the top 5 common mistakes newbie investors make.
Please use the Spotify link below, or if you haven’t got time, check out the transcript.
Remember: All investing involves risk. The content of the podcast is for informational purposes only and is not investment advice. Please always use caution and diversify.
Hello and welcome to episode 8 of alternative investing with MyConstant. I’m Chris Roper and I’m head of communications at MyConstant.
And I’m Trevor Kraus and I’m Content Manager at MyConstant.
Thanks for joining the podcast today Trevor. Tell our listeners what today’s podcast is about.
So today we’re talking about the five things that you should do when you’re investing. Five good pieces of advice.
What are you investing in at the moment Trevor?
I have some investments in stocks and bonds from when I was very young.
I see. Do you have any investments in MyConstant?
I do. I have a few thousand dollars put on fixed-term loans. That I’ve laddered — ending at different time periods.
I also do a bit of investing. And I’ve only been doing it for 5 or 6 years. How long have you invested for?
Since I was 1. My Father works in finance. So anything that grandparents gave me, he’d invest. Just luck of the draw.
Yea, that’s cool. It’s good when you have a family member or influential people in your life who are into investing. Otherwise, many people leave it very late. Or they never get into it at all. My Parents best investment advice — they said just invest in property.
And aside from that, they’ve always just put money in the bank. In the UK they were earning a decent rate of return — not so much anymore. Interest rates have fallen dramatically.
A couple of my first investments went badly. Before I was at MyConstant, I worked for a few cryptocurrency companies and one of them wanted to pay me in Bitcoin. And at the time I thought it was strange.
What year was this?
2017 or 2018. I can’t remember exactly. I just know that Bitcoin at the time was about $3,000. I agreed to it and made a tidy profit.
After that I thought, wow, cryptocurrencies must be a nice easy way to make money. And I invested heavily during the peak in 2018 or 2019 when Bitcoin went up to $20,000. Anyway, at the peak of the cryptocurrency popularity. I put a lot of money into XRP when it was $3.20 and it kept going down and I kept buying. I ended up losing a lot of money.
But this experience got me thinking about the kind of mistakes beginners make when they first start investing. Think of the common errors and pitfalls they have when they first start. Do you have a story Trevor where you lost money or maybe made a lot?
I don’t. But I know what you’re talking about when you invest in something new and people go in quickly with it. And if it doesn’t work out, they feel burned. Whether it be investing in a business or purchasing a house and then having the market go sour. Something that happened to a close friend of money and now he no longer wants to own a home again. It was during 2008 financial crisis. So he lost a lot of money.
That’s a shame isn’t it? Everyone — especially at a young age should be able to invest. Sometimes people think it’s easy. It is tempting to just do what everyone else is doing, or just believe that you’re going to get the same kind of returns as everyone else. We are hardwired to think that way.
And we end up making lots of mistakes as a beginning investor. I’d say that the main one is a lack of diversification. I’m sure you’ve all heard the phrase, “don’t put all your eggs in one basket.” But it you put them in multiple baskets, there’s less of a chance of breaking all your eggs.
But not everyone is a fan of diversification. Don’t put all your money in one particular stock or investment vehicle. Warren Buffet thinks it’s one of the worst things you can do and you spread yourself thinly. Overtime you can weaken your position. Your returns will average out in whatever the market does.
So if it’s a bear market — a market dropping in price. You could end up with losses. Or if the market is growing by 5 or 10% it’s a good result, but it might not be as big or a turn as you might have don’t if you had not diversified.
The problem with Buffets take on this, is that he’s a full time investor. He has the time to pick over company reports. Look at trends and patters. So for him, or people in his position, it might make sense to be less diversified.
If you just pick the stocks you think are going to go through the roof.
The same applies with investment vehicles. It really does depend how much time you have a knowledge of the market. And as a beginner, you lack that knowledge and experience.
Diversification is a good way to minimize losses. Start by diversification.
Diversification can be quite expensive to manage a portfolio. Management fees can range between 1 and 2%. It’s a great idea to diversify between high and low risk investments.
If you’re not doing it for a job, it means you have another job, and then same time your doing your job you’re investing. You’re not going to be able to give your investing as much attention as other areas of your life. Therefore, you shouldn’t be taking as much risk as full time investors do.
Trevor, you have another piece of advice for first time investors.
Yea, so this is one of the most popular investment truisms out there. If you put this into google you’ll get millions of hits. And it’s investing more than you can afford to lose.
When a lot of people hear this they assume you put most of your money in investments and then put the rest in a savings account. If you think about this quickly, it sounds like a good idea.
But perhaps, in order to not invest more than you can afford to lose. Think about your investments in short, medium and long term. Make money every money, budget it for bills. And the rest you can invest with.
Make sure you have higher risk and lower risk investments.
What you’re saying is, don’t just set money aside that you’re not prepared to lose. Diversification and thinking about your own personal circumstances. So if you have an amount of money you have each month that you’d accept the loss of, don’t just fire it off in any old investment.
Right. And think about when you’ll need the money. Oftentimes, going in and taking money out of your investment can be expensive with fees incurred.
As you said, some are more liquid than others. It’s interesting that you said splitting it up in different risk categories. I said earlier that diversification is one of the first things you should look at. But also, you need to know your tolerance for risk.
Everybody has a different risk tolerance. Your risk tolerance determines what kind of investments you go into.
It’s important to have a plan. Ask yourself that question and maybe you’re a mixture of all of them. That actually leads us into the next common mistake investors make and that’s not understanding your investment.
You need to do your due diligence. It’s easy to get seduced by others investing achievements. And as I said before, we’re hard wired by cognitive biases that we’ll get the result that we had in the past. So we end up selectively reading certain articles which back up those ideas. But really what you want to do is delve deeper and learn about the investment. To succeed at investing you have to research non-stop.
However, you don’t need a masters in financial engineering to learn the basics. It’s really about learning to spot an opportunity.
It’s easy to see a stock rising and think that would be a good long term investment. Just look at Tesla right now. It’s lost 30% of its value for the third time this year. But if you needed money earlier, then you might not realize the return you were looking for. So look into the company and try to understand how the market is working.
Learn the driving forces behind their pricing. Just a little bit of investigative work on your behalf, could have an amazing impact on your results as an investor. And if you do no research at all, you’re really just gambling. And if you don’t understand how you made that money, you’ll have trouble replicating that in the future.
For example, you might come across terms like shorting, short selling — a high risk strategy. You might think, oh there are big gains to be had there, or a stock fall in price and make a gamble that will continue on. BUt unless you understand the risk, you’re leaving yourself wide open.
Or derivatives, which are complex. Only the pros should be dabbling in those. Leverage too, where you borrow to invest, But your losses are amplified when you do this. Even if you’re investing $100 as you borrow from the platform you’re investing through. Even just a small loss or change can be magnified through the use of leverage.
Yea, I’d just say read and do your research. The more you learn about a company, it will never hurt you. It will only benefit the educated guesses you take in the future. If you don’t know anything or relying on the words on your friends and family, you’ll likely be hurt.
And I know a lot of what we’ve spoken about so far it sounds very heavily on one type of investing, which is investing in stock. But actually, this principle applied to all kinds of investing. If you invest in alternative investments, like P2P lending, you have to understand how it works.
We get lots of questions about our platform. What are the risks of P2P lending? And many people still think it’s this high risk investment. But because we use crypto as collateral. You could argue that it’s not quite as risky as it used to be. We use a liquid asset to back the loans so we can sell it if the borrower defaults.
These are the things you should look at. Is there anything specific about this investment vehicle that makes it better or worse than others. You’ll come across lots of different people offering investment opportunities.
Any other advice Trevor?
No, I think I said my piece. Just read, read and do your research — do your due diligence. It sounds basic, but it’s amazing how many people don’t follow that.
New investors tend to rely on the opinions of others. I’ve spoken on copy trading a few times in this podcast and it’s a nice entry point for new investors because you’re copying another investors investment strategy. I use Etoro, but it might be offered by other platforms as well.
Again, due to cognitive biases, we’re hard wired to give credence to authority figures because we give their opinions more weight. Compared to someone who just started.
But sometimes, even experts get it wrong. Just look at the 2008 financial crisis — all the investors got it wrong.
So number four is relying exclusively on news and others.
We’re saturated with media and it’s easy to get caught up in whatever is popular at the moment or what your friends and family are whispering in your ear. I would even just look at Bitcoin or GameStop earlier this year. For many people, crypto and the GameStop company were never on their radar until that moment. And usually by the time a company or a stock has become so well known that everyone knows about it, the money has been made.
It’s a mix of luck and having a strong understanding of company or industry to make those high profits to predict where things are going. Do your own research and get a holistic understanding of what you’re putting your money into.
And consider ulterior motives. I’m not trying to say that your friends or family would try to convince you to buy a stock or invest. Maybe they just want you to enjoy the success that they had.
But consider the published articles around particular companies or investment vehicles you read in the news. There might be a vested interest that’s pushing a particular stock or investment vehicle. And the underlying qualities of that stock or investment vehicle aren’t as good or bad as they’re making out.
So don’t just read one publisher or get one person’s opinion. Do you research and get a bunch of options first and then make a decision.
]Finally, the last mistake new investors make is that they have unrealistic goals. I just want to make this point because I feel like it affected me when I invested in XRP, I didn’t have a goal apart than to make money.
Before you invest, know what you want to get out of it. Saving for retirement or whatever. Think deeply — percentages. How much do you want to get on that. Do you want something more passive that’ll give you a certain return every year?
You’re unlikely to make a million dollars for example. And people with unrealistic goals make irrational decisions.
You want to be a millionaire, so the first time you have a loss you sell, when you might be better holding. Or you start putting more money in when the stock is falling. Just try to understand the reasons you’re going to invest. Maybe you have pot of money and you want a better return than what you’d get in a bank.
Also, think about where will you be happy. Don’t start investing and close out quickly and you might not want your money locked away for large bouts of time. The only surefire way to make a good return when you invest, pick a good company or investment vehicle. Make sure the company has solid financials and hold it. Hold it for ten or fifteen years.
Now, you might not be able to hold on that long. But think, if you got in on Facebook, Microsoft or Apple when they were just IPO’d, you’d be a multimillionaire by now.
Right. Even Bitcoin, it was just one decade ago that people had bought in and no one could predict that they’d make the amount that they made now. So yea, it’s a long game that you’re looking into.
If you go into this trying to day trade and make $100 per day, you have to be very experienced. And do you have the time to invest and learn. My guess is no. I think you should avoid day trading.
Always in the back of your mind, keep a goal. Setting a goal helps you set a strategy. So perhaps goals are a number one thing you think about as a new investor and everything else comes out of that.
And when you have these goals you can build on top of them. So you make one from one investment, you can reinvest and see the money that you’ve made. And you get the satisfaction.
People don’t like delayed gratification.
Right. With these apps you can check your stocks 100 times per day if you want to. In a way, you’re better off buying and taking the app off your phone. And there is a push and pull / fluctuation of the market as a whole.
Every stock is susceptible to highs and lows. Investing is a person thing. We try to give you hints on things to look at and what to educate yourself on. But our experience and expertise wont necessarily be right for you so always do your own research.
And please remember, this this podcast is for discussion purposes only and should not be taken as investment advice. Always use caution when investing and diversify to mitigate risk.
Thank you very much and we’ll speak to you next time.
Thanks a lot guys!
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