Finance Related

After I posted the three mistakes I thought were very useful, my father added the following comment:” One mistake is not knowing the rules of investment, when to get in and when to get out. Other mistake is not understanding the portfolio one is investing in and third is acting on trends without proper knowledge”

This comment warrants some explanation as it stands alone might not be useful to newbies. These are very important mistakes to avoid and I am grateful my father helped me bring them to everyone’s attention. When we avoid mistakes, we minimize risk. We can never eliminate risk but with the right tools and knowledge we create mitigation plans. Let us dissect the three mistakes Dad pointed out. Here are my views.

Not knowing the rules of investment:
It is very important to understand, in any investment, when to get in and when to get out. In my view, there is no hard rule. However, the investor must have a very clear plan of action that gives precise conditions for entry and exit. For example, a real estate investor might have a rule to purchase multi-unit buildings when the price of the building is less than 70% of Fair Market Value. In addition, she might add a rule that covers location, availability of public transport and shops, and maximum number of similar units for sale at the same time. She should not make a purchase until her conditions are mate. A novice investor will hear a comment here and a comment there from so called experts and jump in without real consideration of entry criteria that help those experts become rich. The point here is that a well define entry rule helps minimize huge risks.

The exit point is as import as the entry. There should be two exit points. One for profit and another for maximum allowable loss. Let’s not hold on the losing position more than we have to. Hoping does not make us money. Minimizing losses and slowly building wealth with the winners is the key to our success.

Not understanding the portfolio:
I have fallen into this trap myself in the past. It is easy to create a portfolio based on what others are doing without understanding why they are doing it and what they are doing to monitor it. A friend told me once to purchase x amount of … shares, y amount of — shares etc. I jumped in but never asked why and also did not stay in touch with him frequently enough to know what he was doing with his investment. Needless to say, it was a disaster for me. The point is that we need to fully understand each portfolio we are building and have a clear understanding why we are building it. We cannot build anything without a solid foundation. A house does not withstand natural disasters on the neighbor’s foundation.

Acting on trend without proper knowledge
This is similar to the above. If we strictly follow trend and do not do enough homework to know when a trend might be on a break or reversal, we are guaranteed to fail. Just look at the DOW when it reached 14000. Anyone who went long at that point has lost beaucoup money! Some say the trend is your friend and I want to add only if you know how to follow it. Technical indicators are lagging and they do not provide enough information to know when a reversal is eminent. There are signs for those who analyze them well but newbies need to move with high degree of cautious.

I would love to hear from others so we can all help each other out!

GOD Bless all who read this article!

Biniam Teklehaimanot is the owner of http://www.OnlineMoneyMaking-Now.com and reviews popular home business ideas and opportunities. Biniam’s most popular home business recommendation is the Plug-In Profit Site at: http://www.PlugInProfitSite.com/main-27247 where you can get your own money-making website setup in 24 hours!

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