At some point, someone will talk to you about an amazing investment opportunity. Save yourself a ton of grief and do your homework.
We naturally dwell on negative experiences. It’s what has helped us survive as a species and is a normal thing to do.
Anyone who has invested in the stock market or other investment vehicles more than likely has had a negative investing experience themselves or knows someone else who has had one.
We all hear the stories…
“One day the company was there, and the next day it was gone…”
“Everyone wanted a piece of the pie, it was fresh, it was hot, and then the (insert commodity of choice here) ran such a surplus the market fell right through the floor…”
“This person seemed to know their stuff and was sure we’d all strike it rich. Then they just up and vanished, and I lost my life savings…”
The prevalence of these outcomes is largely because of inexperience, a lack of knowledge, and a lack of applying oneself.
This is where the bad taste left in people’s mouths comes from when we speak about investing and the stock market.
You Have The Power
You have the power over your own destiny.
Why expose your hard earned money to unnecessary risk? Market instability and management mishaps are not “a maybe”, either or both will happen to you.
You have the power to make conscious investing choices and avoid life altering loss, or at least avoid inevitably repeating the same old story about that time you got hamstrung by a poor investment decision.
All it takes is some due diligence.
Due diligence is a self-directed investment prerequisite, not an asset.
There is no grey area. If you are buying stocks on your own,you are within the self-directed arena and you must conduct yourself accordingly unless you have set out to create a capital loss.
Due diligence can be basic, but also complex. We can’t cover all the angles in this one piece, but let’s cover some big red flags out there.
The High Risk & Low Volume Saga
I am sure there is a ton of people that get themselves into this scenario and don’t have a clue what they’ve done.
Our hypothetical person, John, learns of a junior mining company that’s got their hands on a jalopy unobtanium mine on Pandora. It’s a small cap company, their day-to-day trading volume is low, but John doesn’t really know what that means. But the company’s share price is cheap, so it’s a buy right? It will skyrocket! John is absolutely sure of it.
Not a chance!
Suddenly unobtainium becomes obsolete due to the discovery of easyobtainedium, and the market for unobtainium completely tanks.
The company John sold the farm for is small and he regrets listening to the guy on that random comment thread that recommended the company in the first place.
John wants to sell his position and cut his losses, as this company clearly doesn’t have the ability to survive. But there doesn’t seem to be any buyers for the company’s stock, and now John is on a rocky ride down to the bottom.
This is destiny left in the hands of a terrible investment decision, and the story is far too common.
A high risk investment with no ability to dump the position should things turn for the worst, irreversibly. Don’t be like John.
Big Dividend–Big Debts
There are a lot of ways that poorly performing companies can still draw unsuspecting investors in.
One way is offering a huge dividend.
How do dividends work? Normally, if a company isn’t spending much money on capital expenditures, they will take some available funds and issue a dividend back to their shareholders. There are a ton of great dividend companies out there, but there are also a lot of traps.
Keep in mind that you don’t necessarily need profits to offer a dividend. Dividends might be inflated via debt, in some scenarios. This is when a company will borrow money in order to pay their shareholders a higher than normal dividend.
Anyone with some experience will find out how the company can pay its dividend, given the lack of money they make. This might sound trivial and easily avoided, but it traps many people.
If you discover a company that is offering an exceptional dividend, again, self-directed rule dictates you should determine how the company is paying for it.
If they appear to have some extraordinary debt issues, it could be the source of their extraordinary dividend.
Take the time to look into the companies you are interested in, because once that company goes belly up and they owe money all over town, your investment turns to ashes.
Those are just a couple terrible situations that are the tip of the iceberg of investment traps. So read up on how to properly analyze your investments prior to pulling the trigger.
Most people don’t really know what they own, probably some mutual funds that aren’t really doing all that well, expecting maybe one day they’ll get somewhere.
Know what you are getting from your investments. Know what management fees you are being charged. Know what commissions you are paying.
Know what the resulting return on investment is for you!
Usually it is assumed that inflation is roughly 2-3% on average per year.
If you have money saved/invested outside of an emergency fund that isn’t at the very least keeping up with inflation, then you need to figure out a new plan.
Say inflation goes up 3% annually, but you are only earning 1.5% on your savings. Over time, that difference will add up, and at that rate, slowly but surely your money will afford you less and less, year after year.
Even a “hefty” 5 year 3% GIC, you may think you are increasing value, but in reality you’re not. All you are doing is keeping up with inflation. Which isn’t the end of the world, but the way cost of living is increasing (depending on your geographical location), it may not help you at all.
With investing, one of the main goals should be to overtake inflation. This way you aren’t putting your money at risk, only for it to be swallowed by inflation.
Beat inflation, or it will beat you in the long run. Generally, a good goal to set would be somewhere in the ballpark of a 6-10% average annual return on your investments.
It’s attainable, and then you can rest easy knowing your dollars will not turn into pennies over time as far as what they will be able to afford you in the future.
I hope you found some value in this piece. A reminder to stay vigilant in knowing what is behind an investment, what its future looks like, and if your money will stand the test of time.