I realised these are common pitfall because new investors have similar reactions. Not just that, everyone has the tendency to take similar shortcuts to decision making.
Hence, if you are new to investing, these are some common pitfalls to take note of.
It is possible to learn from the silly mistakes of others and this can save you money.
Silly Mistake #1: Choosing a share or a fund based on dividend yield!
Bad idea! And a very common one! I’d share with you an example.
In Singapore, listed company Asian Pay TV Trust (APTT) cut it’s dividend rate massively in 2019.
It was from 6.5c in previous years to ONLY 1.2c in 2019! That’s more than an 80% drop!
Needless to say, share prices fell massively soon after.
Many analyst have highlighted it’s unsustainably high dividend rate which was above its Free Cash Flow.
What about for funds?
If you see the chart below, I’ve filtered for you the top dividend paying funds with yields in excess of 8%p.a.
Choosing these funds seem like a good idea to get a strong dividend income.
But if you check, these funds are in the high yield bonds space.
While high yield bonds have their merits, choosing funds or high yield bond funds purely based on dividend yield is a dangerous short cut to take.
As shown in the chart below, the 3y sharp ratio for these featured funds have been generally poor. This means you take on excessive volatility in your total return.
#Sharp ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Silly Mistake #2: Insufficient time in the market
Firstly, every time you buy and sell, it’s at possibly a 0.5% loss just to brokerage costs.
The next idea always seems like better than what you have. Very common!
Excessive trading will incur you higher trading costs which is a silly mistake to avoid! Don’t fall in love with a new investment idea.
That is a reason why many make their money in property rather than shares trading.
Even though there is stamp duty of close to 3% each time.
Property investments or ownership tend to be 10years, 20years or even longer.
So what is sufficient time in the market?
When it comes to investing, my suggestion is to have an investment timeframe of at least 10years. Equities are trending up especially when you look from a multi decade timeframe,
The cliche quote below from the late Sir John Templeton sums it up.
Silly Mistake #3: Buy High And Sell Low
Especially potent a mistake if you jump on the “hottest investment” bandwagon!
Quick story: I remember a close buddy of mine talking about bitcoin!!
He’s NOT the investment kind of guy and EVEN he was punting some into bitcoin.
That shows that the “herding mentality” and greed can affect investment judgement.
But ALL “hottest investment” idea that promises big gains will falter at some point. Nothing goes to infinity.
If you understand this, you can avoid the typical buy high and sell low problem.
Question what the crowd is buying rather than following them!
To read on, visit https://www.theastuteparent.com/2019/12/silly-investment-mistakes/
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