Not paying attention to costs.

There is a saying – “you throw peanuts, you get monkeys”. Now this is true sometimes, but there are many “monkeys” who will be happy to take your gold coins instead, while giving you nothing much in return. In other words, be careful of what you pay for – weigh the pros and cons, especially in the long term. For example, a hedge fund, with all its razzmatazz pizzazz, may charge you 2% every year on your assets, on top of 20% of the profits you make. But in return, they do not give you a greater return that a humble low-cost index-tracking fund would give you. So at the end of your investment time horizon – after few years to decades, you would be significantly poorer as a hedge fund investor versus being a passive index investor. 

Action step: Ensure that you have a good reason for the costs you pay, especially those that add up to vast amounts in years ahead.

Not being adequately diversified.

A popular saying goes “Never put ALL your eggs in one basket”. This is as true for egg farmers as it is for investors. And the reason is simple – we can never tell with inalienable certainty what happens to the market value of our investment asset tomorrow or next year, no matter how much research and analysis we have put in to evaluate it. With that fact in mind, it is only prudent to look for other assets for our hard-earned resources. What’s more, there indeed are many opportunities that deserve our attention, and money, at any given time. So why not have multiple allocations? The only mistake to avoid is here over-diversification i.e. too many assets (sometimes hundreds), each representing a very small fraction of our portfolio. This usually indicates that the investor does not have sufficient conviction in his/her own choices. Unlike with large indivisible assets like real estate properties, one can very easily diversify even a relatively small portfolio into different stocks and mutual funds (unit trusts). 

Not considering liquidity of the asset

Liquidity is the attribute of the asset that allows an investor to buy or sell an asset quickly and inexpensively. If an asset can’t be traded this way, it makes it understandably far less attractive. Examples of less liquid assets include real estate, art, vintage cars, wine, etc. Whereas examples of highly liquid assets include stocks and bonds of large publicly traded companies, exchange traded funds, futures contracts, and cryptocurrency. For an investor, liquidity is a very valuable attribute, so much so that if an asset is becoming less easily tradable, the investor must consider selling it off, even if it still has strong fundamentals. This is because the intrinsic value becomes insignificant if the asset can’t be exchanged for money – unless it keeps producing cash value in the form of healthy dividends or interest.