However, it is imperative for every individual to be aware of the common mistakes that one should avoid while investing.
1. Insure before you Invest
There is nothing more important than life. Insurance is crucial as it helps you through financial difficulties and unprecedented times. In this era of uncertainty, it is essential to stay protected against all financial perils, not for your own benefit but also for your financial dependents.
A health insurance policy should provide sufficient medical cover for you and your family members.
Term life insurance provides a high sum assured, which would be enough to cover your family’s expenses and maintain the lifestyle that you are providing them
2. Investing without a plan is In-wasting
People do invest in various asset classes in the name of investments but sometimes don’t have any plan or strategy. Riding ships along the wind doesn’t lead one to the harbor, one needs to have a direction to reach there.
Similarly, having a plan or strategy is very important to achieve financial goals, otherwise, it doesn’t carry any meaning to invest. It is merely a waste.
3. Avoid biases and don’t love your stocks
Investing is as much as watering a tree and we often tend to water few trees more than others. It is simply because we love them, we get attached to them. We get biased and pay more attention to them.
We keep watering them despite them not needing or deserving a lot of it. That’s where we get it wrong because a garden full of blossoms cannot be built by paying attention to only a few trees.
Here, your portfolio is the garden, and the stocks are your trees. When you’re building a portfolio of stocks, you need to be as rational as possible.
You have to treat every company according to its fundamentals and even avoid showing them love when they don’t perform.
4. “Changing views with changing times” and “Not changing views with changing times”
Add a little volatility to the market, and the whole narrative of a person changes. A little correction in the market and everything start seeming cloudy. One bad quarterly performance and we start seeing the dead end.
We must not forget that ups and downs are part of the market. Our view shouldn’t change every now and then based on market activities which are temporary.
Also, if the stock hasn’t performed in the previous cycle, then it doesn’t mean it won’t perform in the next cycle too. Companies operate in dynamic business environment. We should inculcate a habit of looking at things from a fresh perspective.
5. Having herd mentality and avoiding due diligence
You bought this stock? I’ll buy it too. Mirroring the portfolio of your friend or family is not going to solve your financial problems rather only going to increase them if they are not competent enough to give you any advice. One should do his own due diligence before making any investment.
6. Not fixing your time horizon
The most important thing in life is time and in investments, it is no different. Time is of most essence when one wants to achieve financial goals.
Wealth creation takes time. People often want quick and easy money which lead them to take undue financial risk. Investments should be made considering the time horizon.
7. Don’t become trader turned investor or vice-versa, stick to one!
If the share price rises, I’ll sell it quickly but if the same share price falls, I’ll sit there for years and wait for it to rise. This confused mindset leads to chaos.
It is like selling your winners and holding your losers. This happens when people don’t have the patience or do not have any understanding of the business.
8. Not paying attention to asset allocation
Having proper asset allocation helps in optimum return and minimizes risk. Asset allocation helps in creating a diversified portfolio consisting of various asset classes such as equity, debt, gold, etc. which enables one to generate a higher return with minimum risk.
Even within an asset class, it’s not just picking the right stock; it’s also about picking the right quantity which will enable better returns.
All asset classes don’t move at the same pace or same direction, that’s why having the right mix is important. A strategically created portfolio with a long-term approach helps to grow wealth and avoids any extreme downside risk of loss.
9. Not saving enough and unmindful spending
Warren Buffet quotes, “Don’t save what is left after spending but spend what is left after savings.” People often don’t have control over their emotions and spend mindlessly on materialistic things or short-lived things.
People often tend to fall for various big billion deals or the great Indian sale and end up spending a lot more than necessary which leads to saving less and not investing enough.
One should limit expenditure by preparing regular budgets which will lead to an increased focus on saving and investing.
10. Trying to time the market
Time and again, markets have proven that it’s not about timing the market but rather the amount of time you spend in market which is important.
Buying low and selling high sounds simple but is far away from reality. There is no guarantee to it because market fluctuations happen daily, and no one can predict the direction of the market.
When you try to time the market; intuition, biases, and fear of missing out takes over the simple rationale of investing.
One should focus on research and the only time that matters is the time you start investing and the amount of time you stay in the market.
Investing should be backed by strong research and a realistic goal over a certain time horizon. Ensuring that individuals are mindful of the above mistakes may not guarantee profits, but it will ensure that the investments are protected by the vagaries of the markets and life.
(The author is smallcase manager & Founder, Niveshaay)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)