Common pitfalls of investors--mistakes investors tend to mak
?? 3??à·? By Goh Mui Hong??Stock prices have fallen considerably during the current economic malaise. Although there is the risk that stock markets may not have bottomed, the current low stock prices offer an opportunity for retail investors to gradually invest in selected blue chip stocks that may have previouslybeen out of reach.??In the event that you decide to invest, here is a list of pitfalls you should avoid:??Inadequate Asset Allocation-- Asset allocation is the process of dividing your pool of money among different assetclasses, e.g. between income investments such as fixed deposits and bond funds, and growth investments which will include riskier investments such as stocks or physical property. The former is considered the safer option, however bond funds are riskier than fixed deposits although they may offer a higher return in the long run. Growth investments are more volatile and have been very popular in Singapore because they offer the potential for higher returns.??The mistake most investors make is to put most of their money in one form of investment, say stocks or properties. As a result, when the property and stock markets decline, these investors are in an extremely vulnerable position. Itis always prudent to keep aside at least enough cash to provide a cushion of about 6 months' monthly income as a safeguard against sharp declines in the stock and property markets or in the event that you need cash urgently.??Lack of Diversification--Having decided that you want to put aside some money in an investment portfolio comprising say equities, you should always aim to diversify the stocks within your portfolio so as to minimise your risk exposure to any one stock. Not only should you diversify between stocks, you should also diversify between different industrysectors, and if resources permit, within different geographical regions. This would reduce your risk exposureshould any one company or sector or region suddenly experience a sharp decline.??If you are a first-time investor, you may not have much funds at your disposal. The purchase of one stock alone could utilise the bulk of your investible savings. One way to diversify is to invest in unit trusts which usually cost about $1 per unit when launched. These unit trusts are investment portfolios managed by a professional fund manager. As the fund manager pools the funds from many investors, he can invest in a diversified portfolio that offers lower risk. Unit trusts may also enable investors todiversify across regions, e.g. a European fund paired with an Asia Pacific Fund, or between assets, e.g. investing under an umbrella fund in an equity fund, a bond fund and a money market fund.??Market timing--Some investors try to "time" the