Investing Tricks and Traps (Part 2)

By Jason Fittler

Visit Investing Tricks and Traps (Part 1)

5. Emotions – one of the biggest traps when investing is making emotional decisions.

We are all guilty of this. Most decisions in our lives are made emotionally we then look to rationalise our decision with logic. Once emotion starts playing a role in investing then you are starting to gamble. Good indicators of when emotions are taking over are:

  • You have pre-conceived ideas of what you want to invest in. To avoid this you need to spend time looking at all the different type of investments.
  • You only like advisers who sell the investments you like. At this point you are being sold and not getting advice.
  • The adviser is only telling you what you want to hear. This is a trick by the adviser to connect with you on an emotional level.
  • You get upset when someone disagrees with you. 

6. Free Advice – there is no such thing as a free lunch. Same with advice, if it is done for free then it is a sales pitch not advice. Things to look out for are:

  • Free seminars or ads offering free investment packs. These are all marketing tricks designed to persuade you to buy their product.  The goal with marketing is to get you to hear the same advice from three apparently different sources. Read it in the paper, hear about it on TV and then you go to the seminar, sold.
  • Cheap Advice – with compliance costs and the requirements currently in place for Financial Advisers at a minimum you should be expecting to pay around $2000-$3000 from a full financial plan. If it is cheaper it is because:

1. It is a sale pitch to sell you their product.

2. It is a sale pitch to sell you their product.

  • Australian Financial Services License (AFSL) – the person giving you advice should have an AFSL or be an Authorized Representative (AR) of some who does have an AFSL. If they do not hold an AFSL then it is a sales pitch not advice. Best option is to walk away.

7. Current Investment Trends - are always a big trap for the investor. 

Trends become bubbles, bubbles burst and when the music stops there are no chairs left. Trends are driven by groupthink. Humans survived as a species by being part of a group, many animals do. Being part of a group provides safety in numbers. As such it is not unexpected that we follow the group. 

The fear of being left behind is instinctive in humans as such we ignore all of the warning signs, see nothing but opportunity and join with everyone else. The last investors in a trend are often the most naïve, they join in as to not miss out and have little understanding of the investment of the risks associated with it.

8. Power of Savings - most of your wealth will come about through regular savings. How this money is invested will increase your wealth but not create it.

Having a good saving culture will build you the capital you need to live off. Many investors chase the big returns, looking for 20% return each year. The fact IS that a return between 6-8% per annum is what you should expect long-term.

At 7% return your investment will double each year, but if you also add to the capital through savings it make a large difference.

For example, $10,000 invested at 7% after 10 years will be worth $20,000. If you were to add $500 per month to your capital then in 10 years you would have $100,000.

If you continue this on for 35 years it would be worth a million dollars. 

For more information on any of the above please call us on (07) 4771 4577