There are hundreds of tips, guides and pieces of advice available to investors. However, there are three investing rules that everyone should follow, and this recent story of an investor violating all three is a lesson of what not to do.
NBC news recently aired a story about investor Steven Belcher of Denver who lost his entire life savings of $1.8 million dollars by falling for an investing scam. While his particular story has very modern twists of dating apps, Bitcoin, and fake investing sites, he made three classic investing mistakes that applies regardless of the investment type, amount of money involved or sophistication level of the investor.
Mistake #1: Taking advice from family or friends
In Mr. Belcher’s case, he took advice from a woman he met entirely online on a dating app. He never met her, and being recently divorced, was particularly vulnerable from an emotional perspective. It turns out, this person was fake, as was the advice “she” was giving. The investing site she told him about, a cryptro-currency exchange, was fake and he lost all his money. If your friend, uncle or member of your country club tells you about an absolutely incredible investing opportunity, never, ever invest until you get that investment reviewed by a licensed financial advisor. It is imperative to have a professional second set of eyes that knows how to perform due diligence review the opportunity.
Mistake #2: Letting FOMO drive your decisions
Missing out on Apple and other tech stock rides was the primary reason that Steven decided to invest in Bitcoin. He stated he did not want to miss the next great technology wave. He let his greed and emotion of seeing others make significant money in Bitcoin drive his investment decision. What he should have done is use fundamentals and research to drive his investing decision as opposed to trying to tap into a wave blindly. He did not do the research on Bitcoin, and clearly, he did not do enough research on the crypto exchange that turned out to be a complete fraud that never invested his money and stole it all.
Mistake #3: Putting all your money into one investment
Diversification is one of the most basic investing tenants, and by putting his entire life savings of $1.8 million dollars into one investment, he took tremendous risk. Even if the investment was something else and legitimate, you never invest all into one concentrated security. Diversification is an insurance policy that if one or two securities are having a bad year, often the others will not to the same degree. Financial Advisors recommend that an investor’s portfolio should be in at least ten different securities to avoid concentration risk. Portfolio construction can be a complicated topic that includes sectors, security type, location, geography and many other facets. The bottom line is the old adage of never put all your eggs in one basket is advice that transcends time and current trends.
By following these three rules you can avoid the kind of financial disaster that Mr. Belcher has gone through, and better position yourself to achieve your financial goals.
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