There is a reason why some cryptocurrency investors get it right and others get it wrong. And it’s not so much what they get right, but what they get wrong. Those who get it right often follow what seem to be very boring strategies, namely they save every month, diversify their investments over a spread of assets and stay invested for the long term. Unwise financial behaviour can destroy huge amounts of value in your portfolio. And the most common mistakes are nearly always interlinked. Beware of making these blunders:
1. Believing stories over facts
You prefer to believe promises of great successes and returns. It is this naïve belief that is key to the success of Ponzi schemes. Simply no due diligence is undertaken. You must check the story properly.
2. Confirmation bias
This means only paying attention to information that confirms your preconceptions. So you have listened to what you believe is a good story, committed yourself and then become an uncompromising convert. This is often seen with people who are converts to Ponzi schemes that collapse after they have received a few good payments made with the investments of the late joiners. These uncompromising converts blame everything and everyone else when the scheme collapses.
3. Hoping for the best
You place unjustified trust in your own views, disregarding the facts, particularly believing that investment markets will always provide stellar performance. You allow your expectations to exceed reality.
4. Following the herd
You follow others despite the reality that markets may be reaching their peak. Most followers listen to people boasting at a braai, their dentist or barber, don’t check out the information and invest. You are either investing at the top of the market having been one of the last to join, or you have invested in a scam pyramid or Ponzi scheme.
5. Trying to be a market timing genius
This is one of the most common mistakes in investing. To be a very successful investor you need to buy investments when they’re cheap and sell when they are worth a lot more. The problem is that not even the experts can get this consistently right. Investors who think they can time markets normally get it the wrong way around: they buy high and then panic when markets fall, selling the investment to make a significant loss.
6. Loss aversion
You fall prey to inaction or take only timid actions. When you do sell a badly performing asset you do so at the bottom of the market and then sit in cash when markets recover, compounding your losses. Loss aversion investors also focus on nominal returns instead of real returns. In other words, you do not take account of inflation. So while you see the rand values increase in your bank savings account, your money is losing value if you do not receive interest in excess of inflation.
7. Forgetting about diversification
When people believe they are onto a good investment story they often go in with their all – and then lose not only their shirts but their pants, socks and shoes too. The advantage of diversifying and keeping your investments properly diversified is that if something bombs out, at least the rest of your investments will protect you from any major loss.
8. Chasing the maximum return
Investing on the basis of attempting to get the maximum returns is simply not going to work with no actual plan. You are going to take high risks, which will expose you to actual capital loss. No one can predict what you will actually receive, particularly over the shorter term. What you need are clear investment goals. Some (like buying a new car) can have a higher risk profile, while others (like saving for retirement) should be essential.
9. Not watching the costs
Many investment opportunities do not meet projected expectations because of costs. One of the reasons for the multi-billion rand imploding property syndications was the high cost structure of most schemes where almost as much as 30 per cent of initial investment was disappearing in costs. These costs included commissions in excess of 10 per cent paid to financial advisers and profits to the sponsors. The investors bought the ‘story’ instead of checking the facts, particularly the costs. Any excessive commissions paid to a financial adviser are a major warning signal. The absolute maximum you should pay is three per cent – and even that is high. Small cost differences – even a fraction of a percentage – can make a great deal of difference to your returns over the long term. But do not make investment decisions based on things like costs and tax alone.
10. Deferring some joy
There are those people who make things happen and others who wonder what happened. The same applies to wealth. Those who wonder how the wealthy got rich did not start saving consistently and investing wisely, or dropped by the wayside along the way. You get rich by working and saving a portion of what you earn from the very first day. You need to make clearly defined goals and then stick to them. Have patience. The chances of turning $1k into $1m simply by investing is unlikely; that sounds more like a scam.