Everyone knows that money needs to be invested somewhere and not just saved. Like everything else, we make mistakes even while investing.
Discussed below are the eight common mistakes made by most investors:
1. Taking free advice
A lot of investment decisions are made on occasions such as a coffee break with a friend. Let's say, this friend tells you about a product in which he/she has invested just a few days ago. You are also told that you should be investing in it for your own good. Without even knowing about it properly, you make your mind upon buying it, feeling happy that you have received an advice free of cost.
However, this free advice could cost you a lot in the long run. Before accepting this free advice, we often completely overlook the source's skill-set or knowledge in suggesting you the product? 'Is this person qualified enough to advise me?' you should ask yourself.
It is always better to dedicate some fair amount of time to search for a good financial planner and pay for the advice sought.
2. Buying on obligation
Many a time, a friend or a relative comes up with an offer to buy insurance/mutual funds. You are told that the instrument being offered is the best product designed and created just for you. And you buy it either because you believe this friend or relative or because you feel an obligation that you cannot say no. When it comes to life insurance, this is a common scenario.
Your friend/relative would be an agent of an insurer and would most likely approach you whenever he/she is short of his target. You decide to help and end up paying premium for a policy, ignoring the fact that you just missed out on an opportunity to buy a good financial product which suits you better.
Many a time, a friend or a relative comes up with an offer to buy insurance/mutual funds. You are told that the instrument being offered is the best product designed and created just for you. And you buy it either because you believe this friend or relative or because you feel an obligation that you cannot say no. When it comes to life insurance, this is a common scenario.
Your friend/relative would be an agent of an insurer and would most likely approach you whenever he/she is short of his target. You decide to help and end up paying premium for a policy, ignoring the fact that you just missed out on an opportunity to buy a good financial product which suits you better.
3. Investing randomly
A lot of times you may just pick a product because you heard that it is good. This is known as random investment.
Have you considered your goals, objectives and timeframe of investment?
If you did not, don't worry. You might have picked a mid/small cap fund with high risk without knowing that it is for a goal which is 6 months away. Had you thought of that goal before investing, you would have picked a short/ultra-short debt fund.
4. Investing without research
One thing which always lures us into purchasing a financial product is returns. Investors' eyes light up on seeing returns of 10, 12 or 15 per cent. There are products which have given these returns and you might have chosen one of them based on past performance.
Should this be the only criteria for selecting a product?
Shouldn't we also know about aspects such as fund manager, taxation, liquidity, risk, etc.? Carrying out proper research before investing is beneficial as you would know the pros and cons of a product beforehand. It will also help you make informed decisions.
5. Not diversifying
You might have read this phrase umpteen times: 'Don't put all your eggs in one basket'. The phrase is just perfect from an investment perspective. If you are serious about your goals, you need to diversify. A long-term goal such as retirement cannot be achieved through a debt product such as fixed deposit of recurring deposit. In the same way, an equity fund does not suit a short-term goal such as vacation after 5-6 months.
A tasty recipe is a mix of different spices. In a similar fashion, you need different kinds of products in your portfolio to derive the best from it.
6. Lack of patience
Patience is a virtue indeed. In history, great inventions were not made overnight. Some investments are the best only when held for longer periods. A common mistake by most of us is that we sell a product if it has gone down after just a few months of buying it, despite knowing in advance that the product is volatile and might fall in the short run. Emotions take over and one forgets the effort put while researching on the product.
Many investors shy away from mutual funds for the same reason. Next time when someone talks about mutual funds, they tell him/her to stay away from such products as it failed in their case.
7. Trying to time the market
Timing the markets is something which even experts have failed to achieve. Trying to time the markets is like going on a wild goose chase. Moreover, traders should be doing it, not investors.
If you want to be an investor, invest in a product based on its merits and demerits. There might be occasions such as recession when even fundamentally good stocks fall down. However, that's just a matter of time. If it is good, it will bounce back.
Even the best of equity mutual funds have gone down when markets were down. But, they managed to weather the downside and delivered pretty good returns later.
8. Staying conservative when young
The final mistake is that a lot of us try to be conservative when we are young. It could be because our elders have advised to be so or because of a couple of past experiences. This is a time when we need to be aggressive with our investments. Important goals such as children's education, their marriages, house, retirement etc. would be far away. Conservative products cannot help you achieve these goals.
You might have heard about the power of compounding. This is what will take you to such goals. Take risks by investing in equities. In the long term, equities deliver returns of 12-15 per cent, which no other product can. However, take note of the term 'long'. You may have to wait for 10 years or more to achieve such high returns. Of course, there are other factors such as portfolio review, re-balancing etc. which you need to take care of in this period.
CONCLUSION
These are some of the common mistakes made by most of us. Had you been investing for a few years, you would have already learnt most of these. If not, it is better to learn soon.
A lot of times you may just pick a product because you heard that it is good. This is known as random investment.
Have you considered your goals, objectives and timeframe of investment?
If you did not, don't worry. You might have picked a mid/small cap fund with high risk without knowing that it is for a goal which is 6 months away. Had you thought of that goal before investing, you would have picked a short/ultra-short debt fund.
4. Investing without research
One thing which always lures us into purchasing a financial product is returns. Investors' eyes light up on seeing returns of 10, 12 or 15 per cent. There are products which have given these returns and you might have chosen one of them based on past performance.
Should this be the only criteria for selecting a product?
Shouldn't we also know about aspects such as fund manager, taxation, liquidity, risk, etc.? Carrying out proper research before investing is beneficial as you would know the pros and cons of a product beforehand. It will also help you make informed decisions.
5. Not diversifying
You might have read this phrase umpteen times: 'Don't put all your eggs in one basket'. The phrase is just perfect from an investment perspective. If you are serious about your goals, you need to diversify. A long-term goal such as retirement cannot be achieved through a debt product such as fixed deposit of recurring deposit. In the same way, an equity fund does not suit a short-term goal such as vacation after 5-6 months.
A tasty recipe is a mix of different spices. In a similar fashion, you need different kinds of products in your portfolio to derive the best from it.
6. Lack of patience
Patience is a virtue indeed. In history, great inventions were not made overnight. Some investments are the best only when held for longer periods. A common mistake by most of us is that we sell a product if it has gone down after just a few months of buying it, despite knowing in advance that the product is volatile and might fall in the short run. Emotions take over and one forgets the effort put while researching on the product.
Many investors shy away from mutual funds for the same reason. Next time when someone talks about mutual funds, they tell him/her to stay away from such products as it failed in their case.
7. Trying to time the market
Timing the markets is something which even experts have failed to achieve. Trying to time the markets is like going on a wild goose chase. Moreover, traders should be doing it, not investors.
If you want to be an investor, invest in a product based on its merits and demerits. There might be occasions such as recession when even fundamentally good stocks fall down. However, that's just a matter of time. If it is good, it will bounce back.
Even the best of equity mutual funds have gone down when markets were down. But, they managed to weather the downside and delivered pretty good returns later.
8. Staying conservative when young
The final mistake is that a lot of us try to be conservative when we are young. It could be because our elders have advised to be so or because of a couple of past experiences. This is a time when we need to be aggressive with our investments. Important goals such as children's education, their marriages, house, retirement etc. would be far away. Conservative products cannot help you achieve these goals.
You might have heard about the power of compounding. This is what will take you to such goals. Take risks by investing in equities. In the long term, equities deliver returns of 12-15 per cent, which no other product can. However, take note of the term 'long'. You may have to wait for 10 years or more to achieve such high returns. Of course, there are other factors such as portfolio review, re-balancing etc. which you need to take care of in this period.
CONCLUSION
These are some of the common mistakes made by most of us. Had you been investing for a few years, you would have already learnt most of these. If not, it is better to learn soon.
Posts
Inspiring writings and I greatly admired what you have to say , I hope you continue to provide new ideas for us all and greetings success always for you..Keep update more information..
ReplyDeleteambience creacions floor plan