We are always encouraged to invest our money as long as we have the funds to do so. There’s no doubt that investing is a good thing and important part of managing money well, especially when great care is taken in making good choices along the way.
But there are times when investing goes drastically wrong, resulting in hundreds or even thousands of dollars lost. To help you avoid becoming the victim of investing gone wrong, let’s look at the following stories of investing that didn’t work out so well and explore ways to help you make the best investments possible.
Investing Choices that Went Terribly Wrong
There’s nothing worse than putting your hard-earned money into an investment only to realize that things aren’t going the way you planned. The following investors will never forget about these investments gone wrong:
1. Getting “Dorfed”
David Forrest, The Motley Fool’s current business strategist, shared his mistake in 1999 when he was so-called “Dorfed.” He explained that he, like many other CNBC viewers, committed to following the advice of Dan Dorfman, who he refers to as a financial “journalist.”
In following Dorfman’s advice on one particular company, Forrest said he became overly confident in their stock, which eventually plummeted. For following Dorfman’s lead without doing his own investigating, Forrest said he had an investment loss of $2,000 by the time he sold.
2. The Bear Mountain Scandal
Earlier this year, over 100 investors and creditors, including 18 current and former National Hockey League players, lost more than $13 million is a real-estate development deal gone wrong.
Len Barrie, a major real-estate developer, led Bear Mountain golf resort and other developments into bankruptcy while failing to file tax returns in 2008 and 2009. His antics resulted in each investor losing a lot of money, with current and former hockey players, Mike Vernon and Ray Whitney, losing upwards of $2 million.
Some say the bankruptcy was not Barrie’s fault and instead was the result of dried-up bank credit and falling real-estate prices. However, since his lavish lifestyle continued despite his supposed financial hardships, the investors believe they’ were conned out of their money.
3. Eggs In One Basket
Many people were victims of the financial crisis that originated in 2008. In fact, it hit Larry, a reader of Moolanomy.com, hard and he lost 50 percent of his stock portfolio, dropping it from $800,000 to $400,000 over an eight-month period.
He asked Moolanomy expert, Larry Swedroe, about resolutions for his circumstance, only for Swedroe to reveal that a large part of his lack of diversification. He suggested expanding his portfolio into riskier territory and learning more about investment strategy to understand the market and how to diversify for future investments.
4. Research Doesn’t trump industry wisdom
Keith Pelczarski, a former employee of The Motley Fool, shared his story of how his assumptions backfired big time. He assumed that conducting an overwhelming amount of research on a company he wanted to invest in would be sufficient enough to earn him amazing returns.
He researched annual reports, an S&P report, earnings estimates and more for a semiconductor capital equipment company with what were deemed revolutionary products. But it turned out that all of his research didn’t help because he wasn’t already deeply entrenched in the semiconductor market. He was out of his league and didn’t bail when the stock dropped, leaving him with a major loss to contend with.
Avoid Having Your Investments Go Wrong
While the above stories give some insight into why investments can go wrong, let’s take a deeper look at how this occurs:
- Bad advice: A lack of knowledge about the market encourages many beginner investors to seek the help of others. While this is not a bad practice, you almost have to conduct as much research on who you’re seeking investment advice from as the action you’re being advised to make.
- Bad choices: Whether you’re the victim of bad advice or a lack of education, the complex nature of the market could easily leave you in a position for making bad choices that could cost you big.
- Bad timing: As mentioned in Larry’s story, the timing of the financial crisis had a lot to do with his investment losses. Even though in his scenario, he’d also made some bad investment choices, many people during this time saw their investments go wrong at no fault of their own.
- Bad scams: People can become the victim investment fraud whether they’re a beginner or expert because scams are constantly changing. To protect yourself, know the top investment scams that could stand between you and a positive return.
So how can you avoid having your investments go wrong under these circumstances? Here are some suggestions:
- Diversify your portfolio: As noted by Larry Swedroe, it’s highly important to make sure your portfolio is diversified. Since there is no one way to accomplish this, it’s advisable to seek the help of a reputable professional to make sure you have a good mix.
- Don’t just research, get educated: So many bad choices and scams are the result of naivety. Under many circumstances, conducting a certain amount of research could help fill in some blanks, but as discovered by Pelczarski, sometimes research isn’t enough. If you don’t know a foreign industry well enough, sometimes it’s best to walk away.
- Ride the waves of the market: Most experts agree that short-term investors gain much less than long-term investors because the latter understand how to ride the waves of the market. As with the financial crisis, huge fluctuations do occur, which is why experts don’t recommend selling out of fear when the market drops. Instead, keep your money where it is if you have a solid investment and wait for the market to rise again.
- Develop a strategy: Many people jump into investing without a strategy to follow. This is critical to your long-term success. So take to think about your goals, including retirement or general financial freedom, think about how much money you have to invest then investigate ways to help you plan the best route to reach your goal.
Good investing is usually looked at as a long-term strategy instead of a way to get rich quick. If you remain diligent in your efforts, there’s no doubt that you could become a wise pro at the investment game before you know it.
