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Investment tips on how to avoid these 3 mistakes

Oh, the stock market is on a downturn. Quick, sell! Okay, wait, it’s picking back up again. Buy before it reaches its peak!

Sound familiar? This exact scenario played out during the tail end of 2018 and when COVID19 hit. The last quarter was quite wild for equity indices, and many investors decided to bail and head for safer waters. If you’re a hobby investor or an expatriate in the UAE looking to put away some stock market returns towards your retirement, you might have gone through exactly this sentiment. It’s only natural.

Here I list it as one of the top investment tips I counsel investors against. Whether you’re a client or not, I want you to come out ahead in your investments. So here are my top quick tips for investment mistakes to watch out for.

Mistake One: Sell the dip

Okay, consider the example above. Say the stock market is tanking – as it did at end of 2018 due to a confluence of factors. US foreign policy and trade wars, coupled with Brexit-related uncertainty, played a role. December was the worst.  The S&P 500 was down 9% and the Dow fell 8.7%. In one seven day stretch the Dow fell by over 350 points over six times! It was the worst ever Christmas Eve since 1931 for stock markets.

The natural reaction is to sell, of course. It comes straight from the gut – but is also one of the worst things you can do – given of course that you’re investing in relatively solid companies with a sustainable growth plan. Thing is, it’s practically a given that stock will be more valuable in five years if the underlying company hasn’t gone bust. Even unexciting stock appreciates in the long term. It’s a fact.

The rule here – if you’re planning for financial stability – is to stop trying to beat the market short term. Go long, and hold on. Stop trying to predict short-term fluctuations. You’re a winner in the end. 

Mistake Two: Buy into momentum

A Dubai Financial Market listed company’s stock is rising and rising. Eventually, you give in and decide to buy. After all, good performance now means good performance later, right? That’s how they pick winning racehorses.

Wrong. Look closely at the fine print of most advisory websites, or those advertising funds. They’ll all say one thing in spidery letters towards the footer: Past Performance Is Not Indicative Of Future Results. This fallacy of “performance chasing” – or buying into a good thing because it was good before – is so common that funds now include this disclaimer habitually.

The reality is that a rapidly climbing investment can turn sour quickly. In fact, the longer a stock has been on the up, the greater the chances of correction. Bulls give way to bears eventually; it’s only natural. So buying a stock that’s on the rise can mean it’s about to turn.

Instead of looking at past performance, look at fundamentals. Is the company sound? Does it have a product or service that fills a need? Will it be around in five years? If you’ve answered yes to the above, it might be worth investing in the stock. 

Mistake Three: I believe in land

I believe in land or stock, or cans of beans, or insert whatever in this space. Naturally, there’s nothing wrong with real estate. In fact, like most assets, real estate appreciates long-term, provided you’ve done some due diligence.

But the trouble is with having a favoured asset class and putting your eggs in one basket. For instance, you might think that potatoes are an excellent investment because everyone will eat them forever. So you invest everything in them.

But then a single protracted episode of potato blight could wipe out the humble spud – and your savings with it. Potato blight actually happened in Ireland in 1845 – and so dependent was the island’s population on the spud that there was a terrible famine. A horrible chapter in history, but it teaches us a lesson in diversification.

Regardless of how strong you think an asset class is, don’t sink everything into it. If a downturn happens, you don’t want your entire portfolio to sink.

So there you have it. My three top – and easy – investor mistakes to avoid, in other words – my investment tips. This is just the start though. If you want to create a resilient portfolio that can weather market storms to deliver long-term financial security and a dream retirement, as an expat expert, I am on hand to help with all of the above and more.

About Mike Coady

Mike Coady is an expat expert based in Dubai and is on hand to help with all of the above and more.

Mike is an award-winning money coach and industry leader in the financial sector.

Qualified to UK Financial Conduct Authority (FCA) standards, a member of the Chartered Insurance Institute, a Founding Fellow of the Institute of Sales Professionals (FF.ISP), and a Fellow of the Institute of Directors (FIoD) and featured as a highly qualified Financial Adviser in Which Financial Adviser.

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Blog published by Mike Coady.