Experienced investors will tell you never to invest money that you don’t have — don’t over-invest! In this article, we’ll dive into some ways you can prevent yourself from over-investing.
What is Over-investing?
Over-investing is investment activities that place your investment and overall finance at risk. These are:
- Investing with borrowed funds
- Narrowed investing
- Investing all your income
Investing with Borrowed Funds
It has been said over and over: don’t borrow funds for investment. It might seem like the smart move at the time, especially when the investment appears certain. But it is always a wrong move. Investing with borrowed funds hurts you in three ways.
First, it increases your debt. The goal of investing is to build your assets, not your liabilities. Taking debt increases your liabilities.
Second, it takes away your peace of mind. Investments can go sideways, especially in the stock market. If you invested at night and with borrowed funds, you would find it hard to sleep at night. This can force you to make rash decisions that you will regret for the rest of your life.
Third, and worst of all, if you lose on the investment, you lose twice. In the first place, you lose your investment. In the second place, you still have to return the borrowed funds. It gets worst if you have to pay interest on the borrowed funds. This can trigger a chain of bad financial decisions.
Diversifying is a good investment strategy. It allows you to invest in various investment classes, reducing the risk you would incur if you invest in only one stock.
However, in this case, over diversifying your investment can cause more harm than good.
Over-diversification occurs when an investor is invested in too many stocks. This can be intentional, as in the case of the investor that manually selects his investments. It can also happen to investors that invest in mutual funds. Some mutual funds can hold large amounts of stocks.
Over-diversifying reduces the rewards you get from large stock gains. Given that many mutual funds charge a management fee, a poor-performance mutual fund will make you run into a loss.
The other extreme is narrowed investing. This is when an investor invests all his funds in a single investment portfolio. This exposes the investor to the price swing that is bound to happen, as with investment security,
It is advisable to invest in a variety of assets to reduce risk. While all investment classes have their share of risks, they don’t experience price crashes together at the time.
Investing All Your Income
Some beginners hear about the wonders of investing and decide to invest all of their income in investment assets. This may look like an excellent decision, but it isn’t. When they are hit with financial needs, they resort to liquidating their investments, or worse, borrowing money.
Some investors have made it big by investing all of their incomes. But these investors can afford to do so because they have side businesses or are still dependent on others for their upkeep.
If you are responsible for your upkeep and others, investing all of your income is a foolish investment move.
How to Protect Yourself from Over-investing
To protect yourself from the dangers of overinvesting, you need to develop good spending and saving habits. It would also help if you also learned how investments work. The following steps will help you.
Clear Off Bad Debts
This might seem out of place, but it isn’t. The interests on some debts are more than the profits you can get from investing. This is especially true with credit card debts. As such, whatever profit you make from your investment will become a loss after you square with your creditors.
Invest Only What You Can Afford to Spare
Investing is a good habit, but it should not be pursued at the expense of one’s finances. A rule of thumb is to save 20% of your income. The remaining 80% should be used to cover your basic needs, allow for moderate indulgences and meet up with family and social responsibilities.
Have an Emergency Saving Account
Your savings should be divided into two unequal parts. The larger portion should be invested, while the lesser amount should go to an emergency savings account.
An emergency savings account is an easy-to-access savings account that contains funds for emergency purposes. These include sudden loss of job, health emergencies, and other unforeseen events.
Your Investment Funds Should Come from Your Savings
Your savings should be the source of your investment fund. Don’t borrow to invest. Furthermore, avoid cutting your expenses unnecessarily to increase your investment funds.
Note that you should never use your emergency funds for investments. It is your backup plan for unforeseen events. Using it will leave you severely exposed.
Treat Volatile Investments with Caution
Many people who over-invest do so because they believe they have found the investment plan to make them set for life. This is common with investing in the Forex exchange market and cryptocurrencies.
While it is true that a single lump-sum investment in these assets can change your finances for good, they can also change your finances for bad. A good rule of thumb is to invest 10% of your investment portfolio in high-risk investment classes.
Explore Mutual Funds
Mutual funds offer an excellent opportunity for investors to diversify their portfolios. As noted above, it is essential to examine the stocks and bonds that a fund contains before investing in it.
Numerous guides like this one here can shed more light on mutual funds for you.
Another alternative is index funds. Index funds track the performance of a market instead of focusing on handpicking stocks. The caveat applies here, too: make sure you do your research.
Don’t Mix Investing with Emotions
Sometimes people overinvest in a single investment asset because of greed or fear of missing out (FOMO). To avoid this, always do your research and make your decisions based on the information available at the time. Patience and research are your best friends when it comes to investing.
Know that all investment classes have their highs and lows. If you are looking to buy a stock and it seems overpriced, give it time. The market always corrects itself. When it does, you can buy that stock. This approach, combined with diversifying, will save you from greed.
Over-investing is unhealthy for investors. While it is better than not investing at all, it robs the investor of market gains. Even worse, the effects of over-investing can make one turn his back on investing.
To recap the main points:
- Only use your savings as investment funds
- Have an emergency savings account
- Diversify your investments
- Be patient when investing