A recent article we saw on Moneyweb (along with soccer action at the 2014 FIFA World Cup) got us thinking about ‘own goals’.
In football an own goal is awarded when a player accidentally plays the ball past his goalkeeper and into his own team’s net, much to the delight of the opposing team. Surprisingly this happens at the very highest level of competition as we saw in the opening match of the 2014 FIFA World Cup.
In the investment world, this can be likened to an act that unintentionally harms one’s own interests, which can potentially cost you a lot more than just a match later down the line.
Here are a few we commonly see:
1. Not knowing how much you spend every month
Many people have no idea how much money they spend every month, which is dangerous.
2. Allowing social status to dictate your lifestyle rather than your finances
If you are a doctor, what car should you drive? If you are a fund manager, where should you live? If you are a lawyer where should you send your kids to school. These lifestyle decisions have a massive effect on your overall financial affairs and stress levels. The book The Millionaire Next Door reveals that US millionaires: buy one house and live in it for most of their lives, only buy second hand cars and don’t upgrade them for a long time, and are not big spenders on material goods like clothing. In fact, they behave exactly the opposite of what we’d expect.
3. Investing without a plan
This seems like a no-brainer, but if you are investing with no plan in place, you are destined for failure. A financial plan is crucial for investment success. If you don’t know where you’re going, it will be near impossible to know how to get there. You need to re-evaluate your financial plan at least once a year or if your financial circumstances change.
4. Failing to adequately diversify
A big investment mistake is failing to diversify your investment holdings. Diversification is key to building a successful investment portfolio because by diversifying into different asset classes and geographic regions, you balance your risks. A diversified portfolio should include equities, bonds, property and cash, as well as an offshore component.
5. Making emotional decisions
It’s easy to allow your emotions to dictate your investment decisions. Greed and fear are major drivers of investment behaviour, and it’s a very wise investor who can look beyond his or her emotional urges to make rational decisions.
Simply talking through an investment decision with your financial planner can help. Whenever you make an investment decision, take a few minutes to consider why you are making it. Do you have good, rational reasons, or are you panicking or being a bit greedy?
6. Failing to regularly review your plan
Financial planning is not a once-off exercise. A regular review is a crucial part of good investment behaviour.
You should be having an annual or semi-annual review, when you sit down with your financial planner and spend time assessing your finances and goals, as well as revisiting your plan to see if you are on track and what needs changing. Your Will may need to be updated or your disability cover may need to be increased, for instance.