5 Money Pitfalls You Need to Avoid
COL Investing Advocate
Given today’s economy, we all have financial concerns. While worrying doesn’t solve much, having a plan to manage these challenges can help ease some of the stress. Here are 5 money traps to avoid and ways to spare you from serious financial worries.
Given the uncertainties of today’s economy, we all have financial concerns. While worrying doesn’t solve much, having a plan to manage these challenges can help ease some of the stress.
No matter how much money you may or may not have, here are the top money traps to avoid and ways to spare you from serious financial worries:
1. Becoming a victim of lifestyle inflation
Lifestyle inflation happens when you allow your spending to increase over time with your rising income and desire for a luxurious lifestyle. It usually happens when your income is growing, but the amount you are able to save stays the same. While getting a raise or switching to a higher-paying job is undoubtedly a positive thing, not being mindful of how you spend your extra income can end up straining your finances in the future.
Lifestyle inflation is a real threat because it can cause your spending habits to spiral out of control. This can lead people to spend more money than they actually have and make it more difficult to keep their finances on track.
The fix: Intentionally adjust your spending.
Whenever you get an increase or additional income, be intentional and treat it as an opportunity to increase your capacity to save and invest. Give yourself some space for treats within reason but determine how you want to use this new money to reach your long-term financial goals. Implement a working budget and set up automatic savings. By tracking your expenses and sticking to a budget, you are less likely to allow your spending to get off track.
2. Forgetting to see the bigger picture
Short-termism refers to an excessive focus on short-term results at the expense of long-term value. This is true for corporate reports as well as for our personal finances.
We have seen how the start of the pandemic affected the stock market. From the December 2019 PSEi of 7,815, it fell sharply to 4,623 at the start of the March 2020 lockdown. That’s a -40.8% just within a 3-month period only to recover to 6,583 or +42.4% by June 2020. Several ups and downs happen within the succeeding months thereafter that can really be disconcerting if you are just focused on a monthly view.
Too much short-term thinking hinders our ability to think, plan and act in the long run and it can lead to irrational and counterproductive decisions. It’s easy for us to see how volatile the market has been for the last several months and lose sight of the big picture.
The fix: Zoom out.
Our local market from a bigger perspective has recovered from serious political events like coups and several financial crises. By extending the time horizon, we get to see past the temporary hiccups and momentary events.
The market has gone a long way since and will continue to provide opportunities with positive long-term potential. While longer-term benefits are more abstract and require self-control or sacrifice, there is growing evidence that long-term thinking pays off much better in the long run. Long-term investing helps smooth out the peaks and troughs of the stock market and can be a more successful strategy than trying to time the market.
3. Over-concentrating your investments
Over-concentrating your investments means investing in a few stocks only. While this is easier to monitor, it can create unnecessary risk. Failure to include a mixture of different types of investments with different levels of risk results in a lack of diversification. In the event of a market downtrend, over-concentrated portfolios risk suffering significant losses all at once, while diversified portfolios survive better over the long term.
The fix: Do not put all your eggs in one basket.
Having a properly diversified portfolio is the best defense against unexpected events that inevitably affect the financial markets. When you diversify, you spread across different types of assets and companies, preserving your capital and increasing your risk-adjusted returns.
Aside from stocks, check out the different types of mutual funds and REITs available in your COL account. Consider treating your investments like a puzzle that fits together, and by doing so, you significantly reduce your risk.
4. Avoiding the stock market
It has been a very difficult season for investors. Stock markets have been very volatile, so it’s very easy to just pack everything up and totally avoid the stock market. However, we need to remember that panicking is not an investing strategy. Successful investing has always been about clear thinking and controlling your emotions. Being disciplined in your investing helps a lot in navigating volatile environments.
The fix: Plan it instead of panic.
Getting into the habit of regularly investing even with a small amount of money enables you to secure more shares when the price is low and still get shares when the price is high. This is called “peso-cost averaging,” and it encourages discipline and removes any behavioral biases or emotional factors when it comes to investing. COL’s Easy Investment Program (EIP) allows you to apply peso-cost averaging which can go a long way in accumulating wealth without you having to worry about the market.
5. Delaying financial learning
It’s important to have open and honest conversations about money. Learning how to handle our finances should be one of our fundamental goals. Financial illiteracy is costly to people and society as it prohibits us from becoming productive members of our country. A lack of financial knowledge can lead to large amounts of debt and poor financial decisions. You don’t have to be an expert in finance to manage your money in a responsible way, but always keep in mind that you have the responsibility to own your learning.
The fix: Learn today!
Financial literacy matters. People generally want to make smart financial decisions—even if they can’t always do it right. They understand the importance of financial know-how to create success and financial stability. It always starts with the person, so drop the excuses and start learning!
You may start by signing up for COL’s free webinars to get empowered to make smarter financial decisions. Make it a habit to grow your knowledge in investing to be better equipped to reach your financial goals.
This article is part of Your Investing Journey - COL's monthly email newsletter that contains insights and strategies by the COL community to help you achieve your financial goals. Click here to read more articles like this.
COL Financial is the country’s most trusted wealth-building partner where more than 400,000 Filipinos invest in stocks and mutual funds. COL was founded on the belief that ’every Filipino deserves to be rich’. That is why, for twenty years now, we remain committed to help Filipinos build wealth by continuously providing free seminars, expert guidance and innovate tools.