How do you invest in stocks? What do you invest in specifically?
Many newbies have probably asked a friend or googled these questions.
But there are other questions that are at least as important to ask: What should you NOT do when investing? What should you avoid investing in?
For me personally, investing in stocks has changed my life. I’ve invested myself into financial freedom. It has made it possible for me to move to Portugal with my two young boys.
From where we live, we can walk down to the beach. There is a trail that winds through the dunes and an area with protected wildlife (as you can see in the picture).
We swim, play tennis, sail, and ride horses… a lifestyle that I previously could only daydream about from my apartment in downtown Copenhagen.
Today, I live my dream.
This dream has been possible because I have managed to make a good return on my investment over many years.
It wouldn’t have been possible if I had thrown my money into a few bad investments.
Through my blog and my investing courses, I’m in touch with many private investors. I speak with a lot of people who have jeopardized their savings, and I have recognized some patterns.
In this blog post, I will look at the typical investment mistakes private investors commit.
Mistake 1: They Only Invest in Companies From Their Own Country
There is some geographical blindness when it comes to stock investing.
The typical Danish equity investor can almost only spot Danish companies.
The German investor almost only spots German companies.
If you are from the States, it might be alright only to invest in American companies, but if you live in a country with a smaller size economy, you should consider a greater geographical spread.
Mistake 2: They Invest in Very Risky Companies
Quite a few investors put a big portion of their money into very high-risk companies such as biotech, IT companies, or startups – or even cryptos.
What’s the problem with that?
Most biotech companies don’t have a product on the market yet.
They don’t have an income and they run with a deficit.
What you’re investing in is a hope that they can develop a future medicine. That’s an extremely risky form of investment.
If you take start-ups, the problem is similar. They might have a product on the market, but they probably still run with a deficit.
You can invest in risky business if you really want to, but it should only add up to 5-10% of your total portfolio.
The bulk of your money should be invested in companies with a stable (and growing) revenue and stable (and growing) profits.
Mistake 3: They Have No Reliable Strategy
A lot of people follow investment advice from random TV show or a podcast without being critical or even researching the company.
There are several pitfalls with this way of investing:
- You risk investing in a company that is a flop. It might go bankrupt.
- You risk investing in an excellent company, but at the wrong time when the stock is too expensive.
- Or you risk getting wildly nervous when the stock has natural fluctuations – and selling at the wrong time – because you haven’t researched it yourself.
Mistake 4: They Leave the Investment Decisions to The Bank
Some of the most bitter private investors I talk to are those who have let the bank make the decisions for them.
After a decade or two, it dawns on them that the money isn’t growing, and the only people who are getting rich are the money managers.
They realize – with experience and lost opportunities – what is going on.
Why doesn’t their money grow and benefit from the power of compounding?
Because the bank will almost certainly invest your money in a mixture of their own stock funds and bonds.
What’s the problem with bonds?
This is how bond works: You lend your money to governments or to companies, and you get paid for that. The problem is that in a low interest rate market, that payment is very low.
The second problem with letting the bank invest is the cost.
Maybe you think it’s cheap. Let’s say they charge you 2% to invest your money for you. That doesn’t sound expensive, right? But it is. Because it’s 2% of the entire amount invested. If they manage to make a return of 3% per year and take 2%… well, they are getting fatter than you are.
Mistake 5: They Neglect Investing in Themselves
A lot of private investors buy stocks without really knowing what they are doing.
We send our children to swimming lessons so that they can learn to swim.
We give our children driving lessons so that they can learn to drive safely.
But nowhere do we learn about managing and investing our money. It’s not something we learn about in school, and it’s not something you need a driver’s license for.
To be fair, you won’t drown or kill someone if you throw yourself into it without knowledge or guidance, but you risk smashing your financial future and freedom if you don’t follow some basic traffic rules.
As Warren Buffett says: “the best investment you can make is an investment in yourself.”
Don’t be afraid of enrolling in investment courses. It might be the best investment of your life.
You Are Your Most Important Asset
My life in Portugal wouldn’t have been possible if I had made bad investment decisions.
It wouldn’t have been possible if I had let the bank invest my money for me.
It wouldn’t have been possible if I had bought in greed or sold in panic.
It has only been possible because I have received a stable and good return over years – and that is something I have learned to create.
It’s not luck. It’s based on knowledge.
You can get the first bit of knowledge by reading my book Free Yourself. You can download it here.