Picture this scenario: You’re at a get-together with friends and you hear someone talking about a hot, new investment opportunity. This person says that very few people know about this opportunity. To solidify their expertise, they talk about a previous accomplishment where they timed the market and made money by buying shares at a low price and quickly selling them at a high price. You start to think, “Wow, this person sounds like they know what they’re doing!”
But when you start asking them questions about this new opportunity, you begin to realize that the investor doesn’t know much about the investment or company – instead, they’re focused on the possibility of high returns. You also find out that they plan to divert a large portion of their portfolio towards this investment, confident that they can double their money quickly.
Can you pick up on the three investing pitfalls in this scenario? Let’s go over them and show you how they can be avoided.
#1: The “I Don’t Understand this Investment” Pitfall
In the scenario above, you asked the investor questions about the company, but they couldn’t provide any clear answers. It seems like the investor hasn’t done much research into the company they’re pouring their money into!
Not understanding your investments is a pitfall that you want to avoid. Whether you consider yourself a passive or an active investor, it’s important to stay informed.
Three Steps to Overcome Your Lack of Investment Knowledge
Investing shouldn’t conjure feelings of fear or panic, nor should you feel rushed to make an investment decision. Instead, take your time to build your investing confidence, and be thorough when researching a new opportunity. Here are a few steps that could help:
1. Learn the Investing Basics
Building or refreshing your investment knowledge is a great way to become a more confident and empowered investor. If you’re new to investing, our Get Started with Investing resource will take you through the basics.
2. Research an Investment Before You Commit
Companies that trade publicly on a stock exchange must disclose and report to the public, and you can use a filing system called SEDAR to find documents that disclose a public company’s status and operations. These documents can include annual reports and financial statements. It’s also important that you understand the fees and charges associated with investment products. If you are considering a private company investment, learn more about the questions you should ask and some factors you should consider.
3. Get a Second Opinion
Seeking professional advice can help you make more informed investing decisions. Talking to a registered investment advisor is one way to do this. If you decide to work with a registered investment advisor, stay engaged with your investments by asking questions along the way.
#2: The “I’m Trying to Beat the Market” Pitfall
Our fictional investor gloated about previous financial glory by quickly buying and selling shares at ideal prices, and attributing their success to their ability to “time” the market.
Timing the Market can be Risky
At any given time, there are a number of factors affecting financial markets. That’s why trying to beat the market is risky. If you time the market wrong, it can wreak havoc on your long-term financial goals and your peace of mind.
A long-term, disciplined approach to investing can help you reduce the worry and risk of daily market fluctuations. Focus on developing an investment plan that is suited to your risk tolerance and financial goals.
It’s a good idea to organize your financial goals when developing your investment strategy. Knowing your short- and long-term goals will help you define what you want to accomplish through investing and determine the amount of money you can afford to invest and potentially lose.
#3: The “I’m Putting All My Eggs in One Basket” Pitfall
In other words, failing to diversify your portfolio. In a diversified portfolio, you hold different types of investments so that if there is a downturn in some of your investments, you hold other ones that can help cushion the impact.
The investor in our fictional scenario planned to divert most of their funds into a single investment. They risk losing a significant amount of money if this opportunity doesn’t pan out.
Diversification as an Investment Strategy
Consider choosing a mix of investment products rather than committing a significant amount of your portfolio to one investment type. Diversifying your portfolio can generally reduce the overall level of expected risk. Watch this short video to learn more about common types of investments.
Whether you’re a DIY investor or working with a registered investment advisor, it’s important to choose investment types that are a good fit for you. We recommend asking these four questions when deciding on an investment.
Report a Concern
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393, or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using BCSC’s online complaint form.
Our revamped website InvestRight.org has a new section on high-risk investments, which includes hedge funds. For good reason. Just say the words, hedge fund, and people’s eyes light up with visions of spectacular returns (never mind spectacular risks). It is generally believed that hedge funds are for sophisticated, wealthy investors. The minimum investment for these […]
A couple of weeks ago, we introduced some online games that help build financial knowledge and life skills. Getting young people reading about finances is also good way to give them a solid understanding of how to manage debt and reach their financial goals. There are good materials for a younger audience in formats that they […]