10 investing mistakes one should avoid
Every investor, some time or the other makes a wrong decision regarding the investments. No one is perfect and everyone makes mistakes, intelligence is in learning from own as well as others’ mistakes. In this article we will discuss some common investing mistakes which investors falls prey to and how you can avoid them.
Investing without clear goals or plans:
Failing to plan is planning to fail. This is one of the most common mistakes that investors make. They invest without any clear goals and plans. To have a clear goal is important because if you don’t know where you want to be then you will end up being somewhere else.
Find out what you want to accomplish and plan your investment path accordingly. Set a clear goal for which you want to invest. Once you know how much you want and when you want it, it becomes easier to decide on asset allocation. i.e. how much to invest in equity and how much in debt.
Thinking short term:
Investments must be made keeping in mind the time horizon of the goals. Apart from few immediate needs, most of the investment goals are long-term. For such goals, do not get perturbed by short-term market movements. Usually, long-term investment will give you more gains as the long-term investors get the benefit of compounding. Short-term investors lose the benefit of compounding.
Failing to Diversify:
Diversification of a portfolio is very important. Having most or all of the money invested in one asset or one stock violates the diversification principles and could be costly to the investor. For example: if you invest your entire money in a single stock or single type of asset class then any adverse move in that stock or asset class will have an adverse effect on your portfolio. It is advisable to invest in instruments which have low positive correlation or negative correlation to stabilize the returns and hence the risk of the portfolio.
Imitating or Mirroring someone else:
Remember you are not Warren Buffet! What might be suitable for someone else as an investor might not be suitable for you! Everyone has different goals and different temperament regarding the risk-taking capacity. Imitating or mirroring somebody else’s investing strategy could lead to disastrous results since their objectives are focused on their wealth and not yours.
Not doing due diligence:
Doing due diligence on your investments and keeping a check that people managing your money are professionals, experienced, ethical, meet your requirements and are trustworthy is very important. Investing on the advice of an inexperienced intermediary or in a fund having management involved in dubious activities can impact your fund performance adversely. Always try to look for the data such as a fund manager’s experience to ascertain that you are in good hands.
Buying high Selling low:
The basic rule of investing is to buy low and sell high. However, most investors tend to succumb to greed or fear and do the opposite. A focus on current investment fads and following her mentality might lead to a loss. Investors should not worry about their portfolio in short-term and should always have a long-term view. Markets move in cycles and there are periods of positive and negative returns, holding on to your investment during bad times will only give you good returns once the markets move up.
Investing without keeping in mind one’s risk appetite:
People sometimes invest in instruments which promise them high returns without giving heed to the risks involved in it. One must invest according to his/her risk appetite. If you cannot take a loss of capital then you should not invest heavily in equity, on the other hand, if you need inflation-beating returns then investing in equity is a must. If you are new to markets, stay away from high-risk investments such as sector funds. Invest some portion in debt funds and some in large-cap equity and once you gain some experience, use it to build your portfolio.
Not reviewing the portfolio:
People tend to invest and forget about it. However, it is important to know how your portfolio is performing. Though keeping track of your investments on a daily basis can give you severe anxiety, it is advisable to do a periodic review of your portfolio (preferably yearly). With the passage of time, the risk-taking capacity and the market scenarios may change so keeping a check on portfolio and rebalancing it will be beneficial for the investors.
Most of the investors look at nominal returns rather than real returns. Real returns are calculated after taking into consideration the inflation rate. As the value of a commodity increases with time, the value of your money decreases. It is always important to consider the profits after adjusting it with rising costs. Even if the economy is not in its rising inflationary period a general rise in price is expected.
Reacting to the News:
Depending only on media and news as a source of information can be dangerous because market prices almost always have already considered what you are reading or watching. Always do own research or find an expert on whom you can trust because financial media shouldn’t be the only form of information on which one should rely.
Bottom line: Investing is a long journey and there are bound to be few mistakes but knowing about them and learning from them is how an investor can create a portfolio that realizes his/her financial goals.
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