The recent collapse of African Bank caught thousands of investors and bank clients off-guard while at least two large asset managers were caught with their pants down, so to speak. Instead of shaking your head at the magnitude of the losses, this is a good time to examine the fallout and extract the lessons that you can learn as an investor.

Diversify your investments

“Don’t put all your eggs in one basket”. So the saying goes. Similarly, you should always diversify your investments so that you spread and decrease your risk. For example, if you had invested in African Bank and also invested in other sectors such as resources or telecommunications, you would not have lost as much money as those investors who piled all their investment money into ABIL stock.

Do your homework

The warning signs that ABIL was on a crash course emerged in the first quarter of 2013. Media reports warned of an unsecured lending bubble. This was shrugged off by management at African Bank but if you had taken the time to read the company’s financial statements, you might have realised that it was a risky business plan and hence, a risky investment.

Take the time to do the research and find out as much as possible about the companies you invest in. Base your investment decisions on sound, financial performance and don’t run after the “hot tip”.

Invest for the long term

Even if your retirement money was invested in ABIL stock via your asset manager, you have time to recoup the losses in your investment portfolio if you are prepared to stay invested in the long term. Reacting to the crash of ABIL shares and disinvesting your money will only result in you losing money. However, if you focus on the long term and stay invested, any loss you might have incurred will only be a “paper loss” in the long run.

Don’t try to time the market

A number of investors including at least two large asset managers bought ABIL stock in 2013 when the share price dropped on the back of concern over the unsecured lending bubble. These “speculators” were most likely exercising the idea of buying low in order to sell high. The risk you take in this scenario is that the share price will either not recover or will plummet as ABIL’s share price did, before it finally crash-landed at 31 cents a share, leaving investors emptyhanded. Invest in a stock because you have studied the business model and there are sound reasons to believe that the share is going to increase in value.

Investing in the stock market is one of the best options to grow your money in the long run. The key is to make rational decisions based on sound information and to keep your wits about you when everyone else might be panicking.

Visit Moneyissues.co.za for more articles by Neesa Moodley-Isaacs.