This article covers Top 18 common Investment mistakes to avoid. Most of these mistakes can be avoided simply through awareness. Investments are always meant to keep our future financially secure but we have to make sure that it is done the right way.
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1. Lack of clear Financial goals
Investing for the sake of Investing because you want to save taxes, or because your friends, colleagues, or relatives tempted you to do so. It is only when you are perfectly clear about your own needs and goals, you can take that much effort in the right direction. Investing without financial goals is like driving on a long road without a destination. The goals can be anything – Retirement corpus, saving up for your child’s higher education, buying a car, Buying a house.
2. Forget to write daily expenses
Writing daily expenses will give you an idea of your overall monthly expense. This is good financial habit. You can tally it with your monthly income and decide how much amount you can and should save for investing. You can avoid some expenses like ordering food from outside or go outside to eat, unnecessary shopping. Since different people have different dependencies and expenses. One should have a clear idea about their expenses.
3. Investing without proper risk profiling
Many people invest based on expected returns, without clearly understanding the risks involved. Everyone has different dependencies,
different incomes, needs, age. These factors change a lot. Some can afford to lose 1000 and some 10000 in exchange for greater potential returns. Some have the strong backing of their family some don't. Some can invest 60% in equity (somewhat riskier) assets and 40% in debt (somewhat safer) assets. Investment allocation should be aligned with your risk profile to get maximum returns by balancing risk factors.
4. Forget to consider the impact of Inflation on Returns
If inflation is on an average 6-7% then an investment should give at least 10-12% to achieve some respectable corpus. Value of savings or currency reduces over time if its not invested in such asset categories.
In other words, inflation eats into the value of the rupee and decreases its purchasing power. So, it is very important that investment should be such that it can beat the inflation.
Mutual funds, stocks are some assets which can help you beat inflation and generate good returns for you.
5. Forget to work on Asset Allocation & diversification
Asset allocation is the key to a successful investment portfolio.
You should not put All Your Eggs in One Basket. You are exposing yourself to great amounts of risk by putting all your money in a single asset class, single stock, or single mutual fund.
For instance, you put all your savings in stocks in the pursuit of good returns. But, the markets crashed, and you ended up getting negative returns/losses. You wouldn't have lost your all money at once if you would have invested the same amount of money in different asset classes like stocks, mutual funds (Equity, debt, hybrid, ELSS), Debt classes (FD, PPF, Government Bonds), NPS. This process of spreading your investment across different asset classes is called diversification. It helps you minimize the risk of your portfolio.
Even while investing in stocks, you should diversify them in different companies/ sectors.
6. Try to Time the Market
This is very common mistake in investing. Generally, people make buying and selling decisions based on their predictions or study about the future market price movements. They wait to start investing because the market is too high or they just stop their monthly investment because the market is crashed. It’s challenging for even experienced investors to time the market at a time. Start investing as early as possible and be consistent to get the benefit of rupee cost averaging and compounding.
7. Investing/ diversification in too many assets
You should not invest in too much stock, funds, and other assets which you cannot handle for the sake of diversification.
8. Not reviewing investments regularly
Some assets in the portfolio may give more return in period and some perform poorly. It's a good practice to review a portfolio minimum once a year. Make sure that your investments are still aligned with your financial goals and your portfolio doesn’t need rebalancing.
9. Expect magic in the short term
Short-term investment can be done only if your particular goal is short-term. It is advisable to invest with a long-term horizon in mind. It will get you some respectable returns with compounding. You must say invested for a minimum of three to five years or more to get maximum benefits from your investments.
10. Thinking Historical performance 'only' as Measure for Future Performance
Logically and general thumb rule, yes if historical returns or performance is good enough one must expect good future performance. But only past results are often not accurate indicators of future performance. There are many other measures to assess the investment asset mostly stock & mutual funds. Also, it is very important for a stock or mutual fund needs to go through a market cycle to get true performance.
11. Stop investment or sell off when the market crashes
They sell off their investment or stop investment when they feel the market is going to crash. Sometimes it actually gets crashed but this approach doesn't always help you achieve your financial goals. Investor loses the benefit of rupee cost averaging which actually help you boost your average investment value. Many investors make selloffs or stop (SIPs) investments which reduce their total compounded corpus at the end.
The losses get realized only if you withdraw your investment. Markets are cyclical in nature. A bad cycle is not going to stay forever. Everyone wants money, everyone wants growth. You should have a disciplined long-term approach towards your financial goals and investments. The investor must look beyond the short-term volatilities of the market.
12. Taking decisions on bias
Relying on emotions or bias while investing is a more common mistake. The investor should not rush his investment decisions because he likes the company or his favorite actor does advertisements for that company or have a bias because of some specific reason. Investors also suffer from confirmation bias, the tendency to look for additional information that confirms to their already held beliefs or views. Herd mentality is another type of bias/emotion that investors invest only because there is news in the media and everyone is purchasing that stock. These types of emotions or biases are too risky for the portfolio.
13. Buying high and selling low
The fundamental principle of investing is to buy low and sell high but many investors do the opposite. Instead of rational well-informed decisions, many investor's decisions are driven by fear or greed. In many cases, investors buy high in an attempt to cash in a market bull run. The decision based on speculations is a trap. Generally, many investors do not get a chance to make a profit. The stock gets down very fast when masses abruptly lose interest in that stock/company & investor by fear sell-off with huge loss.
14. Doing Too Little study before investing
Big successful investors, the financial institute performs proper research & review regularly to ensure their investment decisions are correct. The more research & study you do before investing in a particular asset or stock, the better results you can expect from the investment. If investors look at the potential risks, issues related to the asset (company with balance sheet & ratios), one can take informed calculated decision about the asset (stock).
Many times investors gravitate towards the latest "hot" industry. They may know very little, or even nothing, about the technology, operations of that specific business yet they think it will be the next profitable asset or business.
The investor should read an offer document. Check the objective of the scheme, portfolio of the fund (equity or debt oriented), top holdings, risks involved, fund manager details, returns data, and more. An informed investor always has more chances of generating good returns over long term.
In all scenarios investor should well study before investing.
15. Rebalance Investment Too Often
Investors get biased by news, promising headline & get into the trap. They unnecessarily try to rebalance their investment portfolio too often, attracting exit loads, tax which eventually reduce their overall returns.
Frequent reshuffling of the portfolio affects the growth of investments. This is because investment performs well only in the long run. Rebalancing should be done only if priorities changes, needs changes, age factor, risk taking capacity changes.
16. Forget to give time for Financial Education
If you get the financial education from right sources, you can take more informed decisions based on your studies.
Learning is important before earning. Investor's future will be rewarded if he spends time or money to get him educated about investment, finance. and related subjects.
Generally, AMCs (Asset Management Companies/banks) government-backed sources like SEBI, NSE, BSE, NISM are a good place to start for general investment advice or guidance. You could also consult a professional such as a financial advisor to get you started.
17. Confuse in intelligence with a Bull Market
When markets are at all time high and every day making new benchmarks & acting 'Bull', all your decisions investing in some stock or fund is going to be seen as successful. Even mediocre stock will show good returns.
So it is not because of your intelligence or predictions but it is because you are at the right place at the right time and made some good money through pure luck.
When investor goes through 2-3 market cycle and show patience, consistency and takes well informed decision then only he achieves good returns over period.
18. Avoid consulting with Financial Advisor
we go to the doctor if we feel sick, we go to a lawyer for law-related advice but we avoid consulting financial advisors when it comes to financial or investment-related decisions. Everyone is not ready, equipped with the knowledge it requires or time to invest, manage & monitor their investment portfolio. Although you save yourself the cost of a financial advisor or the commission but it may cost you some good return.
Investors who work with financial advisors feels more confidence, clarity, convenience and sometimes more returns than those who do it by themselves.
We all are humans and we make mistakes. Some accept and learn from these common mistakes & some don't. We don't have time to Learn from our own mistakes, It’s always better to learn from others mistakes.
These investment mistakes can cost you fortune and that’s why you must try to avoid them. Successful investing is all about financial education, consistency, patience & long term mindset.
Hope this article helped you know your mistakes. Subscribe to our newsletter & get posted with such new articles.
