Avoid common mistakes if you want the best investment returns possible

What are at the most common mistakes, the worst investments and the hidden high-risks lurking in the world of money?  

They're not as exotic as you might think.  In fact, they're very common errors and investments we've probably all considered or dabbled in.  Here's how to avoid them.

Taking advice from family and friends.  

They are well meaning, but unaware of your true financial position.  Beware the generational-gap-trap.  They may be older, wiser, and highly conservative.  Oh-so sensible, but not age appropriate for you.  On the flip-side young, savvy and hard-working doesn't mean you should jump on their bandwagon.  They have decades to recover from their balls-ups.  Word-of-mouth investments should be a big red flag.  Investments are not horses.  You won't retire on tip-offs.    

Starting a business with a mortgage or a non-working partner.  

It tends to take at least three years for a new business to reach stable ground.  The most successful owners secure a mortgage-free home in their early career and a partner in full=time work.  It's idyllic to think you can go into business and afford housing and groceries, but it's akin to dancing on hot coals.  

"Investing" in your children.  

Don't make the mistake of selling it to yourself as an investment.  Just to be clear, even getting part of the capital back, let alone a profit should be considered overly optimistic.  Gareth Morgan, his son Sam and the Trade Me business are an anomaly.  Besides, Gareth invested an amount that wouldn't make him flinch if it went up in smoke.  And don't forget if you "invest" in one child, a queue should not be considered unfair or a surprise.  Don't proceed unless you'll still be smiling when it's relabelled a gift.  

Buying shares in individual companies.  

This is the most high-risk way to start investing.  Buying a few shares may seem smart and harmless, but it's a massive concentration of risk.  You need to be active in managing them, which requires time and knowledge.  Leave it to a fund manager and buy a fund with wider spread.  It's not an issue for the more experienced with larger lump sums (ball park $100,000-plus).  

Holding free shares.  

Whether they were a gift, inheritance or a hangover from a demutualisation, shares don't make good hand-me-downs.  They're about as useful as someone else's old curtains – not your taste and won't fit.  Ask yourself one question.  If I woke up and found a wodge of notes on my doormat, would I have a strong urge to buy these particular shares?  Chances are you wouldn't.  There are a multitude of other investments that would be more appropriate.    

Collectibles.  

Wine, cars or Lladro figurines?  These are not an investment, they're an addiction.  Harmless when you are wealthy enough to see them as a hobby.  Dangerous when you've sunk a considerable lump of family wealth into them and don't have a bulging retirement fund.  Liquidate and you'll be lucky to get half their value or alternatively lose half your life chasing buyers.    

Bonus Bonds.  

Designed for people who like giving their interest away to complete strangers.  A few people win and everyone else is a noddy for letting them.  Do not give these things to children.  It's the worst financial role modelling you could ever display.  

Selling in a downturn.  It's tempting to roll into cash in a market sell-off (like right now).  But when do you get back in? Remember the old adage that it is further up than down.  If something falls 50 per cent, it has to rise 100 per cent to recover.  Cash won't stage a recovery for you and is likely to cause you to miss it.  

Peer-to-peer lending. These loan companies hook up borrowers and investors.  Originally it was like online dating where a wink each way would see a match and you knew who was getting your money.  Now it's far more faceless. You can split your money and date several at once.  They're a more efficient online version of finance companies that sold debentures.  Having risen from their ashes, don't be under any illusions.  Your investment is being exposed to significant credit risk.  You will be rewarded for that, but heed the past.  

Short-term speculation in anything that moves. There are platforms that allow you to take big bets on currency markets, commodities and shares with only a small deposit to cover the losses.  Effectively you are leveraging up a multiple of what you invest.  Your capital can be quickly wiped out, as it's only a soak-up fund for losses.  Trading isn't a bad investment, its just ultra high risk and not suitable for the vast majority of us.  It's stressful and feeds addictive personality types.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.