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9 Common mistakes investors make
Making investments to grow your money is essential. Most investments these days carry an amount of risk. Investors are prone to making mistakes, especially when they are new to investing. It is common for everyone to make a mistake with their investment at least once during their journey.
However, one can also learn from other’s mistakes and avoid making those mistakes, to begin with. Investing usually seems like a stress-free side hustle. However, first-time investors often find that the truth is far from this myth. Investing takes time, effort and patience. Investing in any asset class can be tricky and can cost you lots of money if not paid attention to.
Investing can be exciting mainly because of the significant rewards it can potentially provide. However, if you would like to reap high rewards from investing, it is important to follow a good strategy. But, sometimes, people who follow a good strategy can also incur losses during their investment. It is usually because of the mistakes made during investment management.
In this article, we will have a look at the common mistakes that are made during investment management. By understanding these mistakes, you will be in a position to avoid them and make better and informed investment decisions.
1.Lack of proper investment goals
One of the most common mistakes while investing in any form of asset is the lack of proper investment goals. You need to articulate your investment objective and deploy the best tools to achieve these objectives. The important thing is to plan appropriately.
Successful long-term investing is 1% action and 99% patience. However, many investors lack that patience and end up messing up their portfolios. To have a disciplined approach, you must look beyond the short-term reliabilities and concerns while concentrating on the market’s long-term growth potential.
It is often seen that people in India do not have a proper investment plan. When the stock market is going up, they rush to invest in stocks, and when the stocks are not performing well, they all put their money in debt.
2. Influence of social media
Social media has the potential to affect investments, both positively and negatively. In fact, social media is one of those effective tools that are referred to by newbie investors when making their maiden investment. Take for example a case of cryptocurrencies. Several telegram channels prop up time and again that claim to offer the right investment advice in crypto investments. Moreover, research has revealed that “social media sentiment is an important predictor in determining bitcoin's valuation, but not all social media messages are of equal impact.”
3. Mistakes during inflation
Investors have a common perception about being conservative at times of inflation. They believe in holding on to more cash or bonds for safe keeping. But these would be the worst steps to take if their objective is to tackle inflation. With interest rates on cash and bonds being at a low, holding too much cash or bond would mean guaranteeing yourself that you will not earn enough interest to match up the pace of inflation. Instead, you would be losing purchasing power over time, to which is the reverse of fighting inflation.
4. Avoid being driven by personal bias
Market fluctuations are bound to happen. However, it’s crucial to stay invested if feasible. Beginners trading in equity let personal bias drive their investment decisions. For instance, many first-time investors tend to either only buy shares of companies they know or companies they like. This proves to be ineffective as companies you know or like may not always be the ideal investment options for your risk profile or your financial goals.
Also, the idea that investing in financial assets or trading in equity makes you rich quickly, limits your focus towards the future, thereby stopping you from thinking about the long-term effect of your investment decisions. This could be extremely damaging to your financial prospects. To make steep profits in a short period, many investors make rash and uninformed decisions, incurring more losses than profits.
5. Mistake of not having an emergency fund
Investors tend to miss out on having an emergency fund that would be beneficial during difficult times. Even if they do have an emergency corpus, they end up depositing it in a fixed deposit account. In fact, the ultimate aim of an emergency fund is to use the money in times of crisis. Hence, money needs to be fluid, generally in the form of cash. Another mistake that's commonly seen is investing emergency funds into assets. This move absolutely defies the purpose of an emergency fund which strives on the back of liquidity.
6. Failure to diversify portfolio
Failure to diversify your portfolio can also cost you significantly in the long run. Inadequate diversification can lead to a lot of problems. Diversification is important because it balances risky assets against more stable options. Thus, your capital won't be eroded entirely.
Investing solely in one class of assets such as equities, bonds or commodities increases the risk and even if you’re a risk-friendly investor, it’s not advisable to put all your money in one basket. Investors also tend to financial assets even when they’re not performing well.
If an asset class is on the decline, many investors and amateur traders are prone to refraining from selling the asset hoping that its value would shoot back up in due time. In most cases, this may never happen, leaving investors with significant losses. Even the best of investors end up making poor investment decisions once in a while. However, what separates them from regular investors is that they don't try to get even with their investments.
Investors must be patient and give their investments sufficient time to prove themselves. However, if a subsequent evaluation reveals that investment has failed to deliver as anticipated, investors should not hesitate to cut losses and exit the investment.
Similarly, market correction is usually not taken seriously by investors. For instance, amid the rising volatility in NASDAQ, sector allocation in equity portfolios has become more important than ever. Investors must pick stocks and sectors based on their risk appetite. However, they should also use this correction to rebalance their portfolio and allocate their resources in a responsible manner.
7. Reliance solely on top performing assets
Isn’t investing in top performers always a good idea? Not necessarily! This one is applicable to investors in market-linked avenues like mutual funds. When investments are made based solely on performance, an important evaluation parameter is overlooked – risk. And investing in line with one’s risk appetite is a fundamental tenet of investing.
Investors must try to understand the reason behind the impressive run. This in turn will help them evaluate if the performance is sustainable. Consider a situation wherein a stock’s performance can be attributed to simply rising markets by investing in stocks that are the season's flavour. In such a case, the impressive performance is unlikely to be sustainable over the long haul and hence is misleading for investors. Therefore, making investments based solely on performance is fraught with risks.
Here’s another scenario that’s seen in the Indian stock markets. If a company’s stock is on the rise, stirred by the successful product launches, increased revenue, and more influx of investor capital, then the stock price will shoot up simply because every investor would want to buy shares of such a company that is going from strength to strength.
However, if the company is incurring losses, having product failures, amassing debt, then a majority of the shareholders would want to dump the shares of such a company, reducing the stock price.
8. Lack of research
Before making an investment, make sure that you research beforehand. Avoid following the crowd and investing in assets just because plenty of others are investing in them. The trend of following the crowd is another mistake done by investors. They're influenced by the people around them or through social media platforms even if a certain alternative investment asset is highly recommended, make sure that you research the stock before investing in the same. Adequate research is the bread and butter to making informed decisions grounded in facts as opposed to instinct or emotions.
9. Investing in businesses you have no idea about
Last but not least, avoid investing in a business you don't understand. Investors of all age groups and experiences fall for the hot tip or the exploding returns of any asset class. More often than not, the hot tip or the meteoric rise of any asset has nothing to do with the fundamentals of the market and more to do with rampant underhand speculation between market players.
Make sure you are not part of that crowd by investing in businesses whose intricacies you understand thoroughly. Secondly, always rely on the researched calls and reports given by reputed stock market experts.
It’s important to always look at both the sides of the coin before venturing into anything that we are not accustomed with. Similarly, one should always undertake thorough analysis before investing their capital in stocks or other asset clauses, while factoring in the mistakes too.
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