Finance Tip of the Week: Investment
by Gareth Cotten on 25/05/10 at 12:13 pm
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Know your investment horizon, and don’t get caught up in day-to-day swings in your investments. Whenever people read about how the market has dropped in a day, or how a particular stock of their’s has dipped slightly, their reaction is to panic and see how they can get out of that position.
A good number of them sell or cash-in their investments, and put the proceeds into another one that they feel has better prospects. Then, when that one dips somewhat, they go through the same process again. And again and again, always chasing that elusive big winner.
This is a terrible way to invest. It’s a symptom of people getting impatient, or over-anxious, and feeling that they can do better on their own if they take back control of their investments. There are three main problems with this:
The first is that it’s impossible to beat the market every time – remember that there are investment professionals out there, who’ve dedicated their lives to studying the markets, and not even they can beat the market all the time.
The second issue is that following this course of action locks in your losses – you make the loss a real one when you sell up the investment, and forego the chance of making it back if you held onto it.
The third problem is that every time you switch investments, there are inherent fees, charges and commissions to be paid – these eat away even more at the value of the investment and, over time, can have an enormous impact on its performance.
Rather do your homework before you get into any specific investment. Know that the fundamentals are strong (solid business model, capable management, strong profit history, good future prospects, etc.); define how long you want to be invested for (your investment horizon – 10 years, retirement, etc.); and then leave it be. All investments will fluctuate up and down over time, but try and subdue the urge to react to the smallest changes, and let it do what it’s supposed to do over the given time period…
Gareth Cotten is one of the growing breed of SA entrepreneurs with that ‘world-domination’ look in his eyes. Gareth runs the coaching and consulting practice 'Good Advice'. Gareth is also the 'course convener' for the University of Cape Town (Law@Work) Start and Manage a Small Business course and the University of Cape Town Basics of Financial Management course. View more articles by Gareth Cotten.
Tags: finance, investment
