5 “Million-Dollar” Mistakes You Should Avoid During Your Investment Journey

Received your first paycheck and uncertain about where and how to invest? Before diving in, be wary of these 5 critical "Million-Dollar" Mistakes you must steer clear of.

1. Not Investing into Income-generating Assets

For beginners in the world of investing, focusing on income-generating assets is crucial. A few examples of income-generating assets include:

      • Stocks

      • Bonds

      • Real Estate Investment Trusts (REITs)

      • Index Funds

      • Real Estate

    and many more…

    But why invest into income-generating assets?

    For example, investing in assets like real estate, which generate income through rental, offers a valuable advantage. Even if the property’s market value decreases, it still holds inherent value as people can continue to reside in it. 

    This allows for renting out the property, and the resulting monthly cash flow serves as a practical strategy to mitigate the opportunity cost linked to potential losses in your investment portfolio.

    2. Dedicating a Large Percentage of Investment Portfolio into Investment Insurance

    In my life journey, I’ve encountered insurance agents, or currently called Financial Advisors (FAs), pitching insurance savings plans promising guaranteed returns after a fixed period. 

    However, there are two reasons why I prefer not to invest too much into investment insurance:

    Firstly, although the risk is extremely low for such insurance plans, the annual returns are also minimal. For example, the typical insurance plan in the region guarantees only 3.25% per year, and even in a higher returns scenario, it reaches just 4.75%.

    Upon factoring in inflation, the returns from these plans hover around 2-3%. In comparison to other assets with relatively low risk (like well-chosen properties) boasting approximately 10% annual capital appreciation, the 2-3% return appears significantly lower. 

    Shown below is an example of Sims Urban Oasis:

    Source: Squarefoot

    The same unit shown grew from $1,525,000 to $1,970,000 in a span of 3 years which translates to about 10% increase per year. 

    If the same amount of money is invested into an asset with returns of 3% annually, after 3 years, this will only yield $1,666,408.
    Applying the principle of compounding, an investor with assets yielding only 2-3% returns stands to accumulate significantly less profit over time compared to an investor with assets

    generating 10% returns. This difference may not only result in a “million-dollar” mistake but into a “multi-million-dollar” mistake as time progresses.

    Year  3% per year 10% per year Difference
    0 $1,000,000 $1,000,000 $0
    10 $1,343,916 $2,593,742 $1,249,826
    30 $2,427,262 $17,449,402 $15,022,140
    50 $4,383,906 $117,390,852 $113,006,946

    Secondly, although both real estate and investment insurance require an amount of money to be locked into the asset (down payment and fixed deposit respectively), it is much harder to liquidate investment insurance assets. Not only does it incur a penalty if the money is withdrawn prematurely but the returns will be even lower if withdrawn right after the plan matures.

    On the other hand, as we discussed before, real estate might also be hard to liquidate immediately but it is still an income-generating asset with inherent value. You’re still able to rent out the property (provided you bought the right property) while in the process of selling it to generate some cash flow.

    However, with all that being said, investment insurance plans are still a good way to safeguard your wealth. If you’re someone with a low risk appetite or trying to build financial discipline, insurance investments plans might still be the way to go.

    If you’re someone who wants more returns on your investments and faster wealth growth, consider investing more of your portfolio in other assets.

    3. Buying and Selling Based on Emotions

    Be fearful when others are greedy and be greedy when others are fearful.”

    Looking at the current market with high interest rates, does it trigger fear if you’re currently managing a mortgage for a property? Imagine deciding to sell based on that fear, heaving a sigh of relief, thinking you avoided a significant debt.

    However, a few years later, you check the property’s value online and discover that its capital appreciation far exceeds what you would have invested if you had kept the property. The realization hits, and you grit your teeth, attributing it to bad luck, but the truth is you have just fallen into the trap of selling based on emotions.

    Instead of succumbing to emotions, taking an objective approach and calculating the Return on Investment (ROI) could have led to a different outcome. Continuing to hold the property and considering the additional expenses as part of the investment cost, or possibly refinancing to a lower fixed interest rate when compared to the current floating rate, might have saved you from missing out on that million-dollar gain.

    But of course, in order to be objective, one has to have knowledge because fear comes from the lack of knowledge and a state of ignorance. Once you’ve acquired the necessary knowledge, you can make more objective decisions grounded in thorough research and calculations. This approach enables you to steer clear of following the crowd and making fear-driven buying or selling decisions.

    4. Focusing on Rental Yield rather than Capital Appreciation

    After steering clear of the aforementioned mistakes, you venture into investing in your first property. Upon your careful research, you found two projects that seem promising. However, one of them has a higher rental yield than the other.

    Source: Squarefoot

    By focusing on the rental yield, you decided to buy Kovan Grandeur. What you didn’t know is that a few years down the road, you will come to regret your decision.

    Source: Squarefoot

    While Kovan Grandeur may boast a higher rental yield in comparison to Stars of Kovan, the latter exhibits a significantly superior capital appreciation. Over a holding period of 3-5 years, the disparity in profits is substantial, with capital appreciation of Stars of Kovan outperforming by approximately $100,000. In contrast, the marginal 1.2% difference in rental yield translates to a more modest variance in profits, ranging from $30,000 to $50,000 for units of this size.

    The difference in profits is 2 times more! If only you had looked at the big picture, it would not have resulted in this potential million-dollar mistake.

    5. Being Penny Wise but Pound Foolish

    Singaporeans are often described by a famous Hokkien term – Kiasu. This term means “the fear of losing out”. This competitive nature is what made us queue hours for a free “limited edition” chicken bag when the same bag can be found in online stores for less than $10.

    Source: Today, Google

    It would not be a stretch to even call most Singaporeans “penny wise” as we made sure we will always get to have the best deals, save the most amount of money and never lose out.

    But what really taught me this phrase “penny wise but pound foolish” is an incident that happened to me not long ago. So I was in need of a new pair of shoes since the soles of my current one have already rubbed out.

    That is when I had the brilliant idea of shopping online since I remembered there were a few cheap deals on an online shopping platform (not going to name it but they always have monthly deals). I was browsing through and found one that is cheap and seemed nice and sturdy. It was marketed as anti-slip and breathable.

    Fast forward to the day it arrived, as soon as I put them on, I instantly regretted my decision. The shoes were too heavy and they were smaller than expected. The soles were too thick and it was not waterproof at all. This means whenever I wear it out during a rainy day, it is guaranteed that my socks are going to get wet. 

    The shoes were so horrible that I stopped wearing them after a few months. In a moment to save some money by buying cheap shoes online instead of going to the retail shop and picking one that fits me (penny wise), I ended up wasting the money and had to buy another pair of shoes (pound foolish).
    This lesson extends to property investments. Don’t be obsessed over the small money and miss out on the bigger money. Even if it might not seem like the best deal at first, it is fine to compromise on that $10,000 if it means you can earn 10-20 times of that in a few years.

    Conclusion

    In summary, here are the five things you should do to avoid these “million dollar” mistakes:

    1. Invest in income-generating assets

    Income-generating assets can take the form of dividend-paying stocks, Real Estate Trust Investments (REITs), or bonds. Among these options, real estate properties stand out as one of the best income-generating assets. They not only offer the potential for rental income but also boast significant capital appreciation.

    2. Do not invest majority of your portfolio into investment insurance plans

    Always bear in mind that the primary purpose of insurance is to protect, not to build wealth. No one has ever amassed wealth solely through purchasing insurance. For novice investors seeking to grow their wealth, it’s advisable to consider investing in other assets, as highlighted in point 1.

    3. Close up your knowledge gap

    When there’s a lack of knowledge and uncertainty about what you don’t know, fear and emotions can come into play. It’s crucial to approach buying and selling with an objective mindset. Prioritize thorough research before making any decisions to mitigate risks and make informed choices.

    4. Focus more on the capital appreciation rather than the rental yield

    While rental yield is undoubtedly crucial, the real jackpot in property investment often lies in capital appreciation. It’s important not to get overly fixated on rental yield alone and potentially overlook the substantial profits that can be gained through property appreciation. 

    5. Look at the bigger picture
    Don’t pass up significant investment opportunities solely in pursuit of the ‘best deal.’ There are instances where the profits gained outweigh the perceived cost of not getting the optimal deal. Keeping an eye on the big picture ensures that you ultimately come out ahead.