There Is Such A Thing As Over-Investing

Over-Investing is a concept that that plays out in different ways depending on the kind of investment in question

In the investment world, there are certain rules that apply that can determine whether you profit from an investment or you lose out on it altogether. One of them is that you should not spend too much money trying to make the investment work, so as not to wind up spending more than what you would eventually receive.

Overinvesting is a concept that that plays out in different ways depending on the kind of investment in question.

In personal finance, it typically has to do with asset management or real estate investing. Where an individual invests more into an asset than what that asset is worth on the open market, he or she has made a loss.

For example, if the market value of a house is N10,000,000 and the owner of the house decides to make improvements or renovations to it that costs a total of N11,000,000, the person is said to have invested over a million naira more than the market value of the house and has thus overinvested.

This scenario plays out where expensive personal consumable investments like cars, houses, and other non-current assets are concerned.

In corporate finance, overinvestment takes a slightly different meaning. Where the managers of a company invest too much in possibly negative net present value projects, they are said to not be acting in the best interests of the shareholders and overinvesting.

This is simply because they are spending the shareholders money without giving too much concern to the resulting impact of such investments on the owners of the funds. The reason this takes place is usually because of greed of the management.

For example, a new project which might not necessarily bring so much profit to the organization might be embarked on by the management of a company because it gives them a reason to spend more money for travelling, allowances, training, and so on.

At the end of the day, the managers benefit from the investment arrangement and investors do not. This form of overinvesting, when proven, is essentially a violation of the management's fiduciary responsibility to shareholders and can be punishable by law.

In stock investment, overinvesting takes yet a different look. While it is not likely that an investor spends more on fees and other costs of investing in stocks, the riskiness of an investment might make the investor lose out on an investment completely while chasing gains that are not feasible.

This could be as a result of pulling out your stock investment prematurely or hedging wrongly, possibly in an asset that yields even more loss – making you lose on both grounds. Other times, overinvesting is as simple as literally overinvesting.

That is, purchasing too many stocks, concentrating your funds too much in one investment area, and so on. It is, as such, important to start small and take the required time to understand the dynamics of the market you are investing in before taking bolder steps.

Written by Lawretta Egba.