1 Fatal Investing Mistake Investors Tend To Commit

After investing for many years, I realize that there is one very important error that investors tend to make when investing. This is especially true when it comes to inexperienced investors who are new to the game.

The personal touch

That mistake is to actually place undue emphasis on the importance of personal relationships with a listed company. For example, an employee of CapitaLand Limited, one of Singapore’s largest real estate outfits, might be inclined to invest heavily in the company and all its related entities because the familiarity with the firm gives him or her more confidence.

Although it’s certainly logical that your workplace might be the company in which you have the best understanding of investing-wise, it can still be a rather dangerous move if heavy investments are made in your employer.

A hidden leverage

Making a large investment in the company you work in has its risks. Your livelihood is already based on your employment with the firm. If the firm’s doing well, then everything is rosy – your salary as well as your investment portfolio can grow hand-in-hand. But on the flip side, if your employer encounters business difficulties in a downturn, your investment as well as your employment might be at stake.

Worst-case scenarios might even result in you losing your job and being left with an investment that’s deep in the red – that can be a double-blow to your finances. The employees of American energy outfit Enron learnt this lesson the hard way. Enron went bankrupt in 2001 after it was found out that firm had been involved with fradulent activities. The bankruptcy left the company’s stock worthless and many employees who had a huge chunk of their retirement savings tied up in Enron stock saw their money evaporate.

Due to this possible correlation between our investment returns and our employment, it might be prudent for investors to give some thought about diversification.

Foolish Summary

The market does not care about your personal relationships with a company.  It is far better to invest in safe proportions so that you are not overly exposed to one company. And in any case, it is always better to focus on the business of a company instead of on your personal relationship with a firm.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.