A lot of new clients who come to meet Lighthouse Financial Advisers get worried when they hear that they will be invested in the most diversified companies around Australia and the world.
They usually have a horror story about someone they know that’s invested in shares and lost a lot of money.
When having a deeper look into this, the way their friend was investing is completely different to what is being recommended to the client and their friend’s troubles could have been avoided.
There are a lot of reasons why people lose money in shares, here are three of the most common ones seen:
“Don’t put all your eggs in one basket.”
An incredibly common mistake of the uneducated investor is to be largely under diversified. It’s especially bad if the investments have gone into just one company.
Diversification means that you can’t make a killing BUT you can’t get killed.
If you have your money invested in a large number of the top companies in Australia and the world, the risk of the value of all these companies never recovering from a drop is greatly reduced when compared to having all your money in one company.
When people want to be under diversified, it’s usually because they haven’t been doing what they were supposed to reach their retirement goals and therefore trying to find the shortcut to a higher return.
People panic at the wrong time.
If you are well and truly diversified across those top countries in Australia and the world, history would have shown you that when the market has dropped, it has always recovered.
When panic ensues some panic sell, crystallising their losses, causing them to be in a much worse off position.
It doesn’t make sense to sell your house for a much lower price than what you bought at, only to buy it back off the person once the prices have picked up again. So, why do it with companies?
People overextend themselves.
A lot of the time this comes from people borrowing too much money to invest.
If you have borrowed too much money and do not have the funds to pay your loan down, you are bound to run into trouble.
It is a very useful way to build your net worth, but you need to be cautious and sure that you’ll be in a good enough position to last through those market drops.
Keep in your mind that you WILL experience many drops throughout your lifetime.
But if you invest smartly and stick to a well thought out plan, you have an excellent way of building wealth.
Dallas Davison, Michael Hogue and Ali Hogue.