Common mistakes made by first-time investors

According to Jason Bernic, financial planning coach at Acsis, a leading financial advisory company, there are common mistakes made by first-time investors, and often these can be attributed to simply overlooking the basics at the start of their investment journey.

Some common mistakes

Bernic says that the most common mistake first-time investors make is not having a financial plan in place. "Any investment should be an element of a greater financial plan because without a plan in place, the possibility of reaching your ultimate goal is reduced. For example, the lack of a financial plan could result in the selection of an investment that is inappropriate, or one that does not aim to satisfy an individual's financial objectives."

Bernic says that not committing to an investment plan is also a downfall for first-time investors. "Financial investment solutions are based on an assumed term and if this period is compromised, it could affect the performance of the investment. Many investors also cash in their long-term investments for short-term purchases, resulting in it being very difficult, if not highly unlikely, to catch up those years of savings."

According to Bernic, another common mistake is not endeavouring to fully understand the investment solution. "It is important for an investor to feel comfortable and confident in their investment and to do so, investors should understand the investment's risks, volatility and sensitivity to the market."

He adds that failing to select the appropriate underlying portfolio will also affect the performance of an investment, as well as its ability to achieve its given objective, whatever that may be.

"Too many investors are looking for a 'quick buck' and are not prepared to invest in their own future. If an individual is on a compulsory scheme, such as a pension or provident fund, he or she often elects the lowest savings option because that will allow him or her the greatest net income each month. Many investors that are on a compulsory scheme also accept the default asset allocation, which is in most cases highly conservative, resulting in a lower return.

"As a rule of thumb, first-time investors that are young should be invested in a more aggressive option, as they have time on their side."

Finding the right fit

Bernic says that once an investor is aware of the possible downfalls, it is then important to choose an investment that is best suited to an investor's financial goal.

"When deciding on an investment, it is important to understanding what kind of lifestyle you want to live, as this will determine what return you would need to achieve this lifestyle, the asset allocation required in order to achieve this return, and the resultant risk that accompanies such asset allocation."

Bernic says that when selecting an investment, there are three main questions an investor should always ask, namely how does this align with my greater financial plan, how did I arrive at this investment proposal and how will this investment achieve my personal financial goals?

"By keeping these three questions in mind, it will allow you to make an informed decision that is aimed at meeting your financial goals," concludes Bernic.

For more information, go to www.acsis.co.za.