Just like anything in life, there is no reward without risk in investing. However, taking too many risks can greatly impact your financial planning and your future. If you are struggling to make ends meet or constantly moving money around to make investments, there is a good chance you need to make some changes. Here are 7 signs you are over-investing and may need to re-evaluate your strategy and asset allocation.
How to Know You Are Over-Investing
1. You’re Living Paycheck to Paycheck.
One of the first financial lessons we learn is to save money now that will benefit you later. While you should be tucking money away every month, it should not greatly impact your daily life. If you are living from paycheck to paycheck, you may be over-investing. If you can’t pay your bills or end up short at the end of the month, perhaps you should scale back your investments. It is okay to sacrifice luxuries to invest instead, but you need to have clear boundaries and balance in your spending.
2. You’re Depleting Your Savings or Emergency Funds.
Any financial planner will tell you that you need a strong foundation of savings in your portfolio. This can be in savings accounts, retirement accounts, or an emergency fund. If you keep dipping into your savings or are depleting your funds each month, these are signs you are over-investing.
The way you allocate your money should follow a natural progression. First, you make sure to pay your living expenses. Next is your rainy day fund. You should always have cash on hand in case of an emergency. After that, any extra cash should be deposited into your retirement and savings account. If you still have some money at the end of the day, then begin looking at investments in real estate or other markets. Your strategy should follow a natural order, not put your financial responsibilities in competition for budget allocation.
3. You Are Not Diversifying.
A well-diversified, disciplined approach is very effective for financial planning. Even if you have enough funds to cover your monthly budget, it is also possible to over-invest in a single area. Diversification is a key principle of investing, so your portfolio should have several different types of investments. This reduces your risk if stocks in one company or sector plummet. Limiting your losses builds a more profitable portfolio in the long run. It is important to have a solid strategy for asset allocation. You can adjust it as needed, usually becoming more conservative as you get older.
4. Gambling on the Outcome
Another pitfall of investing is the gambler’s mindset. Be wary of becoming too reliant on the outcome of an investment. In this instance, the old adage ‘Don’t count your chickens before they hatch’ rings true. You should never invest in a company expecting to use your gains to pay off other creditors or debts. Although investing always comes with some level of risk, don’t invest money you can’t afford to lose. In the worst-case scenario, you should be prepared to part with the cash if your investments do not pan out.
5. You Have Strings of Failed Investments or Businesses.
Many people dream of entrepreneurship. Some even start their own business ventures in the hope of coming up with the next multi-million idea. However, in reality, few people ever strike it rich. While starting your own business or investing in an upstart can be a good move for some, you should not be constantly looking for the next big thing.
A string of failed businesses or investments in start-up companies shows that it is time to adjust your investment strategy. Since most businesses fail within the first two years, it is safer to be more conservative with your investing. This is especially true if you do not have a lot of extra capital to spare. You should also avoid over-investing in hot stocks that are more volatile to market changes. This approach can lead to huge losses with devastating effects on your finances.
6. You Are Checking the Markets and Trading Every Day.
All traders avidly watch the markets and track its fluctuations. But some take it to the extreme and become obsessive. If you are unsure what this looks like, it is similar to any other addiction. You find yourself unable to stop following the market action because they have fear of missing out on a trade. Another sign that you are too fixated on investing is when your portfolio is always at the forefront of your mind or keeps you up at night. To make matters worse, technology can feed the addiction since you have 24-hour access to the world stock markets.
If you feel anxious when you are unable to check the real-time action, it may be a sign you are over-investing. When in a heightened emotional state, people tend to make poor decisions. Although this is not necessarily true for everyone, people who use trading or investing apps every day are more likely to make riskier moves. Anyone trying to time the market to make a quick profit is probably making more aggressive moves than they should be. The best approach is to let your investments work for you over a longer period of time, not to seek a quick payday.
7. You are Trading in Secret.
Probably the most serious sign you are over-investing is when you begin trading in secret. If you have to hide what you are doing, it is a good sign you probably shouldn’t be doing it. Trading in secret is a sign that you may have a problem. Over-investing and over-spending in general can ruin relationships and your financial plans for the future. When you find yourself lying or hiding trading activity from friends or family members, it is time to re-evaluate your behavior. Be honest and ask yourself if you might have an addiction and need to seek help.
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Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to working with children, she also enjoys good friends, good food, and new adventures.