Investing is a powerful tool to help grow your wealth, but it’s a wealth creation tool that’s not without its risks. From stocks to real estate, there are several red flags that all investors – seasoned or beginners – should be aware of. Here, we explore the most common investment mistakes and give actionable advice on how to avoid them when it comes to the investment most often favoured by Australians – property.
1. Not doing your homework
Guilty of not doing enough research before investing? This is one of the most common mistakes that cost investors. Before diving into any investment opportunity, investigate the company or fund you’re considering, review its financial statements and analyse its historical performance. Once you know the risks involved and whether they align with your goals and risk tolerance, you’ll be better placed to make a smart decision.
2. Chasing a quick profit
Focusing on short-term gains is tempting, but it can be a risky strategy that leads to poor decision-making. For example, if the latest investment trend seems like a good way to make a quick profit, it’s often at the detriment of the long-term goal. By taking a patient approach and avoiding the urge to constantly jump from one opportunity to another, you’ll have more sustained success in the long run.
3. Investing on a whim
Throwing money at any investment opportunity on a whim is risky business. Achieving financial freedom involves careful planning about where you put your hard-earned cash. Start by clarifying your financial goals and then figure out how to achieve them by identifying the tools, resources, and strategies needed.
4. Not enough diversity
Don’t put all your investment eggs into one basket. Otherwise, you’re vulnerable to significant losses if that one investment doesn’t perform well. By spreading your investment across different sectors, assets, and companies, you mitigate your risk and, hopefully, achieve better long-term returns.
5. Not calculating all the costs
Protect yourself with plenty of due diligence on every investment. Sneaky charges like management fees, stamp duty, capital gains tax and transaction fees can all add up and eat into your profits. There are also lots of investment scams around, so if an investment sounds too good to be true, it probably is!
6. Reacting to market pressures
Remember, investing is a marathon, not a sprint. Don’t let market fluctuations or scaremongering on the news set you back. It’s natural to feel anxious when the stock market takes a dip, but giving in to your emotions could lock in losses and prevent you from reaping future gains. Always try to stick to your long-term investment plan.
What to consider when investing in property
Property investment is a proven path to financial freedom, but investors will often make mistakes that derail their goals. If you don’t want that to be you, here’s what you need to look out for:
- Overpaying for the property – when you pay too much for a property, it can lead to lower returns and make it harder to generate a positive cash flow. To find the real value, use data like historical growth figures, local employment drivers, vacancy rates and rental appraisals. Learn more on how to choose the right investment property
- Managing your own properties – thinking you can handle everything, including managing your property, is a common trap for many investors. From regular inspections to scheduling repairs and staying abreast of the latest legislation and rental market trends, there’s a lot to consider. Here’s why you need a good property manager and what they’ll take care of.
- Forgetting about depreciation – property investors often miss out on valuable tax deductions when they forget about depreciation. When this happens, they can lose out on thousands of dollars. Make sure you have a certified practicing accountant in your corner.
- Not knowing your long-term goal – don’t leave things to chance – especially with property. A solid property strategy should include your investment goals, the type of property you want to buy, and a clear plan for managing the property and generating cash flow.
- Not adding up the costs properly – don’t let expenses catch you off-guard. You should be accounting for things like property tax, insurance, maintenance, repairs, and everything in between, right from the get-go. Ignoring them will lead to a lower-than-expected return.
- Focussing on one property type – the ultimate key to mitigating your investment risk is to spread your investments across property types (residential and commercial), different regions and states. That way, you can reduce the impact of any one property’s performance.
Learning from investors who came before you.
Property can be a lucrative venture, but it’s never without risks. That’s why it’s so important to do your homework and partner with experts in the field. If you’re keen to start investing, looking to diversify, or building your property portfolio, the First National Real Estate team are here to help!