Fatal Mistakes That Developers Should Avoid When Investing
When you just start investing, it is quite easy to make investment mistakes at the beginning.
Unfortunately, investor-beginners lose money in investing because they have no clear cut goals, risk definitions, strategies. Hence, they underperform over almost every other asset class in terms of returns over the short or long run.
As an individual developer-investor, you can minimize your investment risks and manage to get good returns through investment if you will avoid or learn from the predictable investment mistakes.
What are those mistakes first-time investors make?
🗒 Investing without plan
Investment without any plan can lead to deviating from your path where you might not get any profit.
“Risk comes from not knowing what you are doing."—Warren Buffett
For example, one crucial mistake you may make is to invest in stocks or commodities you don’t understand how much returns you can get in long or short terms.
As a developer-investor with strong analytical and logic skills in the background, you need to analyze a company stock and a company at all with the mindset of owning the company before investing in it.
When it comes to picking the best company stocks, you have to consider different metrics that investors usually use to analyze companies.
I have defined the top-10 most potent and useful metrics in investing through my extensive research and analysis: revenue/sales, earnings growth, cash flow, stock price, net profit margin, and more.
If you want to find more information about my top-10 favorite metrics I am looking for before investing in stock, you can read about them in my upcoming newsletter (+bonus cheat sheet on how developers can save more cash monthly in 15 easy ways).
Remember, not all shares that trade in the stock market are safe for investment.
Don’t trade, instead learn first then invest.
Always decide your goals and objectives and appropriate benchmarks for better results.
💸 Investing without diversification
Diversification is the key to reduce the risk when you invest.
For example, most developer-investors hold vast chunks of their employer’s stocks but little else. Or they own other handful stocks in the same industry like tech or IT.
In a nutshell, to reduce risk without compromising your returns, you should invest in at least 10-15 unrelated investments and diversify your investment portfolio based on your asset allocations.
Asset allocation is basically the mix of investments in a portfolio.
It describes the proportion of cash, bonds, and stocks that make up any investment portfolio and maintain the right asset allocation—the most crucial decision long-term investors can make.
To determine which factors influence your investment portfolio, read my article on personal investment strategy for developers.
Investors often lose a lot of money by putting all of their investments in one place. Diversification helps you minimize the risk as the profit from one asset can neutralize the losses of another.
🏦 Not paying attention to the admin fees and taxes
Banks and brokerage fees can form a significant portion of your investments to eat your returns. For example, if a fund is returning 8%, but it had a 2% admin fee, your net gain would be 6%
And these fees will compound over time to a much more significant number along with the simple and compound interest.
On the other hand, every time you buy/sell/hold an asset, your broker or bank will get commissions for holding and executing the trade, that’s why you should trade as least as possible and find a broker or a bank, which will offer to open and maintain your security account with low-cost operational fees.
If you read “Thinking, Fast and Slow” by Dan Kahneman, you know that automating investments means paying yourself first and achieving dollar-cost averaging. The last one means investing equal dollar amounts in the market at regular intervals while controlling market fluctuations and buying assets at different price points and the best timing. Moreover, investment automation will allow you to avoid order fees, so you will pay once to set up a monthly contribution.
Another fact that shorter you hold an asset, the more taxes you pay on it too. The tax rate on your income depends on your tax country residence. The bigger your capital is, the more you have insecurities and immobile assets, the fewer taxes you would pay for the specific period.
🎯 Having a short-term focus
The truth is that most investor beginners focus on investing in the stock/commodity market for a shorter period, even though the long term investment performance is pretty consistent.
Because the longer you hold, for example, stocks, the more consistent your future returns will be. In fact, for the 1-year and 5-year holding periods, the range of possible returns is entirely predictable.
Let’s compare the 1-year and 5-year growth of the S&P 500 index:
Due to the market crash in March 2020, the S&P 500 index fell, but according to the chart above, the index grew to its past performance and continued its growth.
If you are a well-paid developer, chances are you looking for an investment with a long-term focus. You know that it will tend to have steady and consistent returns and big profits over time.
Compared to hyper-focused investors in the short term, you will not struggle to perform well daily or even hourly, because you earn well and don’t need to chase big profits immediately.
Just keep your focus on the long run, and you will be generously rewarded in the future.
📚 Lacking the understanding of financial language
Indeed, this is a big one!
No doubts that most developers are usually well-educated and professional people. Still, not many are convenient with understanding financial definitions or expressions when it comes to financial literacy.
If you are serious about your investment, it is a prerequisite to become financially literate and take advantage of all the options. Even if you are not confident, googling things that you don’t understand and asking a lot of questions helps — a great deal!
“We were not taught financial literacy in school. It takes a lot of work and time to change your thinking and to become financially literate."—Robert Kiyosaki
Be sure you are conscious of all the financial terminology you are facing during your investment research. Try to find the explanation to any unknown word on your own first, if you are still unsure or have questions, don’t hesitate to get a consultation with an expert you trust.
Be flexible and humble, and learn from mistakes. Before you start investing, you should be able to explain why you’re buying.
Have a long-term view and ignore the short-term volatility, because low-risk investment with a long-term horizon may later yield high dividends.
Investing your money is quite a challenging thing to do in the beginning! And still, it is vital to learn and apply it as just savings alone cannot help you achieve all your financial goals.
Disclaimer: Author’s opinions are their own and do not constitute financial advice in any way whatsoever. Nothing published by IlonaCodes constitutes an investment recommendation, nor should any data or content published by IlonaCodes be relied upon for any investment activities.