Just about three months ago, I wrote on four smart financial decisions I had made in the past. As humans, we also make mistakes in some aspects of our lives, which include finances too.
In the previous post, I mentioned how useful it was to learn from other people’s mistakes. You may therefore find it worthwhile to go through the following financial mistakes I made in the past, especially if you’re of the younger generation.
Closing my first mutual fund account within just 2 months of opening
In reference to the previous post about SMART financial decisions, I made it known that I opened my first investment account in my early twenties, after attending an investment seminar. In fact, over-excitement from the seminar propelled me to sell my then multi-coloured phone to fund the investment account. This was a Nokia (2300) brand phone which I had used for just five months.
Due to the strong passion to begin investing, I ignored the fact that I bought the phone for far more than the price I resold it. Imagine buying a phone at GH¢150 (then ¢1,500,000) and then selling it just after five months of usage, for GH¢60 (then ¢600,000). That was exactly what I did.
As you can see, this was surely not financially prudent. What made it worse was that the investment account could not last as it should have been. Selling my first fancy phone to fund my first investment account appeared to be easy. However, coping with the ‘phoneless’ life afterwards could not stand the test of time. I couldn’t even wait for three months- I promptly went back to the financial institution for the account’s closure.
Even though it was a good initiative on my side to open an investment account at an early stage, it was also dumb to close the said account just after two months of opening. By now, you may be aware of the cost implications of closing an investment account prematurely.
First, the investment fund (an equity mutual fund) had made losses during the two-month period I stayed invested. Hence, the GH¢60 invested had significantly reduced in value to my disappointment.
In addition, I was charged 3% of the remaining amount as early withdrawal fee (which I was not made aware of during the account opening).
As if what I went through was not enough, I further topped up the retrieved money with additional fund sourced from my SSNIT (students’) loan instalment to purchase another fancy phone. This was Nokia 6610i, bought for GH¢200 (then ¢2,000,000). Imagine what GH¢200 could do if invested in 2006.
Certainly, this was a clear example of opportunity cost [the profit I could have gained from investing the GH¢200 but gave up and rather chose to spend the GH¢200 on a luxury phone].
Not diversifying my investment portfolio sufficiently
Back in the olden days, I would be staying glued to the television set on Saturday evenings awaiting the NLA (National Lottery Authority) lottery draw on GTV. Just like other kids at the time, the only means to be part of the lottery game was to randomly pick 5 out of the 90 numbers to be drawn and watch if any of them would stand a chance of being drawn.
Imagine staking 5 out of 90 lotto numbers. The chances of winning are definitely less as compared to staking many numbers such as 10, 20, or even 30 out of the 90 lotto numbers.
Realising how difficult it was to get any of my selected numbers being drawn, I henceforth decided to go beyond five numbers.
I quite remember writing down at least 10 different numbers just to increase my chances of ‘wining’ and indeed, I did ‘win’ on many occasions 🙂
I’m sure by now you’re wondering what lotto numbers has got to do with investment diversification. Now, let’s take a look at the Ghana Stock Exchange. Imagine owning stocks in just a couple of the 40 listed companies and regularly sitting close to your computer screen to monitor stock prices on the market.
You would realise that your chances of having your stocks being among the gaining list are very less. The situation is different when you own stocks of several listed companies instead of few ones. That is the relationship I’m trying to draw between the lotto numbers and investment (stocks) diversification.
During my early stage of investing, my investment picks were confined to few products, in particular stocks. Similar to the lottery story above, I would be staying close to the television watching the GSE updates section of business news.
Unfortunately, the few companies from which I owned some stocks were outside the winning team most of the time. Besides that, my portfolio was easily subjected to avoidable shocks and turbulence effects of the stock market in times of bad economy.
Not taking advantage of market falls
Although history shows that stock markets always come out of crisis, we try to shy away from bad markets, either consciously or unconsciously. A number of seasoned investors advise us to take advantage of falling markets. One such key person is Warren Buffet who is noted for the statement that “the key to successful investing is to buy low, [and] sell high”.
Nonetheless, the fear to lose one’s investment forces us to do otherwise. This was a similar situation I found myself in- I ignored the opportunities in fallen markets. In fact, I had witnessed the stock market fall a number of times but failed to take advantage of that.
As explained earlier, the lack of diversification exposed my investment portfolio to turbulence effects of the stock market in bad times. This effect could have been minimised or neutralised if I had purchased more of the fallen-priced stocks at the time. One means to mask stocks’ losses is to buy more of the fallen-priced stocks.
In doing so, you aim to neutralise the negative effects (losses) posed on the currently owned stocks.
Selling stocks at the wrong time
The lack of proper investment diversification resulted in the sale of stocks during needy circumstances. Surely, selling stocks without making any gain is not worth it.
The worse part is that fees and commissions would be paid irrespective of the negative returns. Buying or selling stocks on the GSE attracts a commission of up to 2.5% of the traded amount (This, I never knew at the time though).
Thus, within a short period of holding the stocks, a total commission of 5% (for both buying and selling) was paid to the stockbrokers. Even though I sold them to make ends meet, the timing was not right to make some gains.
This could have been avoided if I had properly diversified my investment (by including other investment categories such as short-term products). At least, I could have waited for a while so as to make some capital gains.
Lessons that could be learnt
Failure, they say, becomes a progress when we learn from it. Although I failed to maintain my first investment account, at least, the passion seemed to be still latent. This passion resurrected a few years later when I opened another account which is still active to date.
Like the saying goes, ‘don’t let your fall turn to be your downfall’. Furthermore, limit your expenses on luxuries.
Again, don’t be a victim of poor investment diversification. With a well-diversified portfolio, you stand a greater chance of winning many times. Proper diversification is essential for the resistance of shocks on investment portfolio.
Finally, take advantage of market falls. Purchase more of good companies’ stocks when prices go down. In that way, you minimise the negative effects (losses) on currently owned stocks.