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How To Avoid Investing Pitfalls

Aug 17, 2007
The majority of us will, at some stage, have to make a decision on how to achieve the financial goals we set for ourselves. With rising disposable incomes, there are various options of selecting the best avenues for investment. While there is always the lure of making windfall gains, there are also stories of investment decisions having gone awry and investors losing all their capital and more. There are some rules to follow as you go about making investments from your hard earned income.

General Guidelines
Have a Plan: Set realistic goals before you even set out to invest your first dollar. The plan will depend on factors like your income, age, risk appetite, and expected return on investments. The higher the risk, the higher the return on the investment. Obviously, you would not like to put all your capital in high-risk investments. A balanced allocation of funds across all available asset classes will best serve your interests. This plan should be your guide for investments in the future.

Delay: Once the plan is in place, try not to delay the investment process while forever waiting for better opportunities to emerge.

Employer's Matching Contributions: Employers generally have matching contributions towards some plans. Make it a point not to pass these up as they enhance the value of your contribution substantially.

Professional Fees: An increase in investment opportunities and disposable income has spawned an entire breed of professionals, who make a career of managing your funds. While the really busy people may not have the time to manage their investments, most of us do have the skills and time to manage without professionals. This amounts to saving a tidy sum in professional fees.

Investing in Stocks
The guidelines given above are valid for investments in the stock market also. There are some additional pitfalls that should be avoided before taking a plunge into the markets.

The proliferation of broadband Internet access and the cutthroat competition amongst on-line brokerage firms has substantially lowered the transaction costs associated with share transactions. This tempts many to invest in stocks with a short-term horizon and high turn rate. There is no substitute for long-term investing backed by solid research. Avoid investing on the basis of tips.

Invest only in sectors and stocks you understand fully. There are always hot sectors and stocks that are in fashion. Many investors have lost their shirts while trying to make quick gains by chasing these stocks. Have a diversified portfolio, but avoid over-diversification.

It may not always be prudent to invest in a stock just because its price has dropped substantially and it looks very cheap. There are always good reasons for the fall in stock price and there is no guarantee that it will not fall any further.

Knowledge of technical analysis will help you to make an entry at the right time and save money.

Leverage or buying stocks on the margin can lead to substantial losses, if your calculations go awry. Avoid investing with borrowed funds.

Investment based on sound research, without leverage and for the long term can fetch you substantial rewards. Do have a plan with realistic goals and you should be well on the way to making a success of your investments.
About the Author
David Gass is President of Business Credit Services, Inc. His company publishes a free weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com.
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