Investment always comes with challenges and risks. It is simply a package deal. What is most important is getting prepared to handle these challenges and risks as they come.
The best way to get started with that is to gain knowledge of what common challenges you would likely face ahead of time.
Regardless of the investment approach you decide to take, a thoughtful process remains crucial. This is even more so with private investing, considering the illiquid nature of the investments, the multi-year commitment required, and the limited rights and transparency afforded investors in a private investment fund or in private companies, to those who invest directly.
What are the challenges new investors commonly experience or struggle with?
Even more, how can you successfully handle them?
1. Overwhelming Information
Before getting involved in investments, many people try to gather information about the basics, which is great. The problem is that there is an overwhelming amount of information on the internet. One would find a lot of seemingly complex and even contradictory advice which only succeeds in not only overloading but confusing new investors. The best bet is to find credible and reliable sources and strategies to employ in order to avoid all the noise.
2. Hidden Risks
Being new in the game, new investors have no experience with the many unknown risks and pitfalls in many seemingly simple investment strategies. The result is multiple major hits to their portfolios quite prematurely. The best way to beat this is to gather all the most important information and to stay as aware as possible. Gain acquaintance with all the risks involved in any strategy you have your sights set on before you accept it as an investment option.
3. Lack of Adequate Capital or Assistance
New investors often struggle with having limited capital for their investments. This challenge is only made worse by financial instruments that are unaffordable. This challenge can be addressed by considering partial or fractional shares, which involve only buying part of stocks. A couple of common examples are the use of REITs to combat real estate investment challenges or using automated investing tools with low minimum deposits.
Starting out in the world of investing with little to no external help increases the risk. It is best to make use of a form of investment advising, whether automated or live. Doing so increases your assurance of seeing a return on your investment.
4. Over-Diversification and Bad Timing
A common self-inflicted challenge is trying to invest in too much at once. Often done in an attempt to gain insulation from risk, this strategy is counterproductive because it can significantly stunt your portfolio’s growth. Instead, start out with 2 or 3 great options to invest the majority of your portfolio in.
A less common but also self-inflicted issue is deciding to make an investment just prior to a financial downfall. The capital invested in doomed to be lost before any profit has been made. This risk can be reduced by employing a strategy called dollar-cost averaging, where you invest into the market in bits and diminish larger fluctuations in the value in your portfolio over a long period.
5. Poor Personal Finances
New investors often look towards their financial future without pausing to take a look at their financial past. It is not only crucial but necessary to get your personal finances in order before making investments. Organize and pay off all unsecured debt to avoid paying high interest rates, which are almost certain to sap any investment gains you might realize.
