10 Financial Investing Mistakes to Avoid This Dussehra
However, it is imperative that every individual be aware of common mistakes that should be avoided while investing.
1. Make sure 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 age 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 coverage for you and your family members.
Term life insurance provides a high sum insured, which would be enough to cover your family’s expenses and maintain the lifestyle you provide for them.
2. Investing without a plan is a waste
People invest in various asset classes in the name of investments but sometimes have no plan or strategy. Driving ships along the wind does not lead to port, you have to have a direction to get there.
Likewise, having a plan or a strategy is very important to achieve financial goals, otherwise it makes no sense to invest. It’s just a waste.
3. Avoid prejudice and dislike your actions
Investing is like watering a tree and we often tend to water some trees more than others. It is simply because we love them that we become attached to them. We become biased and pay more attention to them.
We keep watering them even though they don’t need or deserve much. This is where we are wrong because a garden full of flowers cannot be built by paying attention to only a few trees.
Here, your wallet is the garden and the stocks are your trees. When building a stock portfolio, you need to be as rational as possible.
You should treat each company according to its fundamentals and even avoid showing it love when it is not performing.
4. “Change views with time changes” and “Don’t change views with time changes”
Add a little volatility to the market, and a person’s whole narrative changes. A small correction in the market and everything starts to look murky. A poor quarterly performance and we begin to see the impasse.
Remember that ups and downs are part of the market. Our view should not change from time to time based on market activity that is temporary.
Also, if the stock didn’t perform in the previous cycle, that doesn’t mean it won’t perform in the next cycle either. Businesses operate in a dynamic business environment. We should inculcate the habit of looking at things from a new angle.
5. Have a herd mentality and avoid due diligence
Did you buy this stock? I will buy it too. Mirroring your friend or family’s portfolio will not solve your financial problems but will only increase them if they are not knowledgeable enough to give you advice. One must do one’s own due diligence before making any investment.
6. Not fixing your time horizon
The most important thing in life is time and investments, this is no different. Time is of the essence when it comes to achieving financial goals.
Wealth creation takes time. People often want money quickly and easily, which leads them to take undue financial risks. Investments must be made taking into account the time horizon.
7. Don’t become a trader become an investor or vice versa, stick to one!
If the stock price goes up, I will sell it quickly but if the same stock price goes down, I will sit for years and wait for it to go up. This confused state of mind leads to chaos.
It’s like selling your winners and retaining your losers. It happens when people don’t have the patience or have no understanding of the business.
8. Not paying attention to asset allocation
Having an appropriate asset allocation contributes to optimal return and minimizes risk. Asset allocation helps to create a diversified portfolio made up of different asset classes such as stocks, debt, gold, etc., which helps to generate a higher return with minimum risk.
Even within an asset class, it’s not just about picking the right security; it’s also about choosing the right amount that will allow for better yields.
Not all asset classes move at the same pace or in the same direction, which is why having the right mix is important. A strategically created portfolio with a long-term approach helps build wealth and avoids any risk of extreme loss.
9. Not enough savings and unconscious spending
Warren Buffet quotes: “Don’t save what’s left after you’ve spent, but spend what’s left after you’ve saved”. People often lack control of their emotions and spend mindlessly on materialistic things or ephemeral things.
People often tend to fall into the trap of various big billion deals or the big Indian sale and end up spending way more than they need to, which leads to saving less and not investing enough.
Spending should be limited by preparing regular budgets which will lead to increased focus on savings and investment.
10. Try to time the market
Time and again, the markets have proven that it’s not about timing the market, it’s about the time you spend in the market, which is important.
Buying low and selling high sounds simple but is far from reality. There are no guarantees as market fluctuations happen daily and no one can predict the direction of the market.
When trying to time the market; intuition, prejudices and the fear of missing something take precedence over the simple justification of the investment.
You have to focus on research and the only time that matters is when you start investing and how long you stay in the market.
The investment should be backed by solid research and a realistic goal over a certain time horizon. Ensuring individuals are aware of the above mistakes may not guarantee profits, but it will ensure that investments are protected from the vagaries of markets and life.
(The author is manager of smallcase and founder, Niveshaay)
(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)