This month’s article focuses on common investor mistakes and how avoiding those mistakes will reap handsome dividends.
Mistake 1: Investing without thinking about your objectives
People often invest before considering what they want (or need) to achieve. This is akin to getting in a car and driving off without knowing your destination! Any investment objective should consist of at least two numbers: a monetary amount and a period of time.
For instance, you may target a doubling of your capital within five years. Working backwards we would calculate that this could be achieved with average annual returns of 15%, ideally implemented within a balanced, diversified portfolio of low and higher risk investments.
Alternatively, you might look to generate additional income from your investable capital. This requires you to identify suitable income-producing investment opportunities, compare their risks and returns, and calculate the amount of income that can be generated. Secured debt investments may be an ideal way to achieve this objective.
Whatever you do, start with the end in mind. This will help you choose the right path.
Two real examples illustrate this:
1) Andy is an IT manager working for a global tech company. He earns £160k pa which is more than enough to cover his monthly outgoings. He wants to buy a much bigger home but doesn’t currently have the capital required for a larger deposit, even though his income is sufficient to support the larger mortgage.