Investments are mostly associated with certain risks. in other words, how much risk we take to make our investments will decide the types of returns we gain from them. However, the profit or loss of investments are not always dependent on the investment risks. Most of the time investor make losses because of some common investing mistakes. But do you know, these mistakes can be avoided?
In this world of information overload, it is easy to browse through a few websites and consider the art of investments as something easy to learn, implement and benefit from. We forget that investments is not only about making money, it is also about retaining and growing that money. Ever so often, we learn about people who completely lost the plot when it came to money matters and ended up in financial despair.
Let us, in this blog post examine the most common investing mistakes and how to avoid them.
Investing Mistake No 1: Giving in to “tips” and “advice” from unqualified persons
Joseph P Kennedy Sr., the father of the American President, John F Kennedy is associated with an oft-repeated illustration in this regard. Kennedy Sr. was in his own right a very successful businessman and investor. One day, in late 1928, he stopped to have his shoes shined on his way to work. The shoe shine boy began a conversation with him and started advising him on which stocks to buy. He went to his office and sold all his stock holdings. A few months later, on 24th October 1929, the Great Wall Street crash took place.
“You know it’s time to sell when shoeshine boys give you stock tips. This bull market is over.”
“Tips” to make money are offered everywhere by colleagues at work, friends, relatives and may be even your neighbourhood shop owner. Most of whom do not have adequate knowledge on the fundamentals of investment.
It may seem less glamourous, but it is wiser to seek the advice of qualified investment professionals who will guide you through the more technical areas of money management and investment.
Investing Mistake No 2: Lack of Clarity of Goals and Ad-hoc Investing
Not knowing “why” they are investing in a specific investment vehicle is one of the biggest investing mistakes, which salaried individuals make. Sometimes, it is made on family advice like buying a house or to save tax or to just put money aside for some “vague” rainy day.
This results in the invested capital either being skewed towards a few financial instruments, thereby increasing the risk, or being scattered across multiple instruments making it difficult to track, review and manage.
An investor needs to do some soul searching with some guidance from a financial expert to arrive at the projected financial milestones in her life and her goals. This would help in arriving at a suitable investment portfolio which is aligned to life goals and is suitably diversified; provides a healthy rate of return and which at the same time is easy to review and re-balance.
Investing Mistake 3: Selecting Investments Based on Past Performance
All financial instruments bear a message in their prospectus and in their advertisements and notifications that “Past performance is no guarantee of future results.” We even use it as a manner of speech, but how many of us pay attention to what is meant by this phrase. Most investors do what is known as , “performance chasing” that is putting their money in asset classes which are considered to be “out-performing” the market leading to sharp devaluations and losses.
An investor would do well to remember that when it comes to investing, one should be forward looking and ascertaining whether an investment instrument follows a methodology to gain from future developments. It is not an easy task and is effective only when the guidance of experts- who are able to assess valuations and future potential, is taken.
Investing Mistake 4 : Trying to Time The Market
Timing the market is best left to those who are closely dealing in the stock markets like the “algo-traders” who use specialised software to take split second decisions. For the rest of us who have day jobs or business ventures and families to take care of, it makes far better sense to follow a long time strategy. As we have seen in past blogs here or in other articles, the stock market in the short term my gyrate in any direction sometimes in extreme leading to panic or euphoric sentiments. However, over a longer period of time, it provides stable returns.
It is not just the stock markets but the bastions of traditional investments such a real estate or gold where sentiments of utter bullishness occur leading to a point where prices reach unsustainable levels before collapsing.
The best way to tap the benefits of stock market investment is through mutual funds and as we mentioned earlier, a well-diversified but manageable set of funds.
When it comes to investing in gold or real estate , an investor needs to look at various key factors before opting for them since they are fairly illiquid investments.
Investing Mistake 5 : Getting Emotional About Your Investments
Human beings are an emotional lot and much as we hate to admit it we are driven to action by our emotions. When it comes to finances we are no better. Fear, Greed, Ecstasy, Dejection and despair all step in and cloud our financial decisions but we rarely allow space for pragmatism and objectivity.
We despair that we do not have money or time to invest and yet do not hesitate in buying the latest state of the art television on EMIs. We invest our bonus cheques into stocks which our best friends advise us and then forget all about it for a few years. We think that insurance is a way to save tax and we fear spending money in consulting a financial planner. Sometimes we take it a notch higher and get hopeful and attached to a losing investment proposition in the hope that it will turn us and give us our dreamed for returns.
It is important to have a very clear-cut, courageous and objective approach to investments. An investor must realise that it is better to cut one’s losses and run; rather than to hold on to false hopes. To avoid the pitfalls while investing for your financial goals, prudence and caution play an important role; however, a bigger support can be from a qualified financial planner. Seeking the help of a financial planner to help chart out your financial goals and strategy and carrying out periodic reviews and re-balancing of your portfolio can prove to a big enabler in achieving your financial goals successfully.