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02 March 2024

5 investment mistakes to avoid in 2011

Most investors are cautious since 2010 has been a turbulent year. (GETTY)

By Sunil Kumar Singh

Ignorance is no bliss when it comes to investing!

In the world of investment, one slip-up could wipe off a part or the entire of an investor's hard earned money in one go.

And all you have to do to digest the fact is to take hindsight. For scores of investors, the year gone by is best forgotten. Asset bubble, stock market ups and downs, currency manipulations, real estate downturn, etc, etc. 2010 had them all.

No wonder, every morning most of you would wake up and look for a simple answer to the question: will my money work for me, what should I do to protect my investment, and how should I avoid investment trapdoor?

To find out the answer, Emirates 24|7 talked to experts, and here are the top missteps you must avoid while making investment decisions this year.

(1) Avoid value traps

There is usually a broad classification of retail stock-investing strategies - growth investing and value investing.In simple terms, value investors, as the name suggests, go by the value of the stock, i.e. looking at the fundamentals and buying stocks that are undervalued or below their worth and they believe the stock price has the potential to go north.

Growth investors, on the other hand, usually look for companies that they believe have faster growth and higher earning prospects compared to their peers or the benchmark index, which will lead to higher stock price in the future.

However, experts caution that investors need to look at the low valuation of a stock carefully.

"Investors should avoid falling into value traps," said Khaled Masri, Head of Brokerage, Rasmala Investment Bank, Dubai.

A number of investors tend to buy a stock just because it looks very cheap. However, an undervalued stock does not necessarily mean the price of a stock would go up in the future, Masri added.

He said low valuation, may also mean there is something fundamentally wrong with the stock or the company. So an investor shouldn't go on buying a stock just because it looks under valued, rather they should look at the fundamentals of the stock.

(2) Don't be rigid in taking decisions

One of the common mistakes investors make is to get inflexible while taking their positions, especially when the value of their investment is falling, say experts.

"Failing to review regularly is one of the biggest mistakes an investor must avoid in 2011," said Steve Gregory, Managing Partner, Holborn Assets, Dubai.

Experts point out that investors should remain nimble in entering and exiting the market.

"When a stock market keeps on falling, a lot of investors tend to hold on to the shares waiting for their value to go up. Rather, in a volatile market investors should carefully track the market movement and be flexible enough to take decisions," said Masri.

(3) Avoid knee-jerk reaction

Another big misstep investors need to steer clear of this year is reacting in a knee-jerk way, say experts.

"They [investors] should avoid over-reacting to good and bad news. During volatile times, investors easily get panicked and start selling their shares indiscriminately. Whilst they should remain nimble in taking decisions, they should also avoid getting panicked," according to Masri.

(4) Don't pay heed to rumours

Rumours swirl, and investors get carried away by them, quite often. And this is especially true when markets dive to news depths. Experts however advise not to pay heed to uncorroborated rumours.

"They [investors] should not react to unsubstantiated rumours," said Masri.

(5) Avoid excessive leverage

Not all debts are bad, unless you pay them back. And when it comes to investment, excessive debt is a bad word too. And therefore, investors should not fall into the trap of using excessive leverage, warn experts.

In addition to these missteps, failing to plan finances, failing to pay off debt before investing, failing to diversify, investing for the short term and expecting immediate gains are other big mistakes an investor must avoid in 2011, according to Steve Gregory, Managing Partner, Holborn Assets, Dubai.

5 biggest investment pitfalls of 2011

RBS Coutts, the private banking arm of the Royal Bank of Scotland, in its 2011 investment outlook has highlighted 5 biggest investment pitfalls  investors should avoid.

Emirates 24|7 caught up with Jean Maurice Ladure, Head of Investment Strategy, Switzerland, RBS Coutts, to know in detail these 5 biggest investment pitfalls of 2011.

According to him, investors in the Middle East should not think that:

(1) Cash for anything other than short term equates to a strategy of taking no risk:

"We believe cash is not risk-free at the moment. This is primarily because interest rates are not expected to be high in developed markets in 2011 and in 2012. This means investors from any region, for instance Middle East, who wish to put their money in dollar or euro would get close to nothing. Last year, real returns of cash deposits were negative and it may well be the case again in 2011. But obviously, nominal returns on cash will remain positive," Ladure said.

(2) 'Buy and hold' is a smart investment strategy at the moment:

The second pitfall would be to believe that buy-and-hold, which is quite a common investment strategy, will continue to work in the coming year, he added.

"Our assessment is that there will still be a lot of volatility in the global financial markets and investors will have to switch between assets to get returns. Therefore, buy-and-hold is not going to be a good investment strategy."

(3) Emerging markets are expensive:

The third big mistake, according to Ladure, would be to believe that emerging markets are expensive and cannot make further progress in 2011.

"We are of the view that there is a significant shift in the risk attitude from investors towards emerging markets and that the market can go further up. We also expect further inflows of foreign capital into emerging markets," he said.

(4) Government bonds are a safe asset class:

The fourth mistake would be to consider government/sovereign bonds in developed markets as safe assets.

Government bonds are historically considered as safe assets, but we believe this is not the case at the moment, Ladure said.

(5) Latest rescue package to Ireland has stopped any risk of further contagion:

The final mistake would be to assume that the latest rescue package for Ireland would stop any further risk of contagion, Ladure added.

We believe the euro-zone's debt crisis would worsen substantially if a larger member such as Spain or France got into difficulty and/or the crisis was transmitted deeper into its banking system. We believe uncertainty about the euro-zone's viability will weigh on the euro into 2011, he said.