Investment mistakes to avoid lays out the things not to do, so that one can maximise the returns on investment. Most of us consider investing to be difficult, and we might need a degree in finance to understand it. But in reality, it’s quite simple. Investing would make a lot of sense by doing some homework and following some practical guidelines. Managing behavior is very important as some simple mistakes can cost us dearly.
Here are some major investment mistakes to avoid:
Ignoring Asset Allocation
If all investments are into a single asset or type of investment, then if that asset underperforms or faces a downturn, then the entire portfolio will be negatively impacted. Spread investments across equity, fixed income, commodity, real estate & gold. This gives stability to portfolio during market fluctuations & temporary setbacks.
Investing without Goal
Investments will yield their results if they are tied to their objectives. They can be broadly classified into 3 categories: short-term, medium-term, long-term.
Short term goals are to be accomplished in a few months to within a couple of years. Example: emergency corpus, funds for vacation, etc.
Medium term goals can be around 2 to 5 years. Example is accumulating the down-payment for a house or car.
Long term goals are to be accomplished at 10 years or more. Examples are children’s education, retirement, etc.
Short & medium-term goals can be achieved with fixed-income instruments like fixed deposits, corporate bonds, NCD’s (non-convertible debentures). For long term goals, one can invest in a mix of fixed income and market-linked instruments like stocks, mutual funds, etc.
Searching for Ideal Investment
Pursuit of an ideal investment is a delusion, as markets are unpredictable & constantly evolving. Also, what looks like an ideal investment for one, might not be the same for someone else. And constant search for the perfect one, will lead to analysis paralysis.
Plan your investments according to your financial goals and adopt a practical approach for your goals.
Investing on Tips
With the dearth of information online, and everyone becoming an investment advisor, don’t fall for too-good-to-be-true investments. No one can predict the market movements consistently, so always capture available information with a pinch of salt.
Underestimating Power of Compounding
Compounding refers to the process of earning returns on the initial investment as well as the earned interest. An investment for at-least 5-7 years for the compounding effect to take place. Time and compounding should be used for long-term wealth creation.
Overlooking Investment Risks
Every investment has some risk associated with it. One should be aware of it, and do investments based on individual risk appetite.
Fixed Deposits, Bonds, Mutual Funds, Stocks are in increasing order of risk.
Following the Crowd
Herd mentality can have a negative effect on portfolio. If everyone speculates on the same stock, and starts buying, then the stock gets over-valued and will surely get corrected or crash. Similar thing happens when everyone starts selling a stock. So it’s better to develop one’s own investment strategy and follow it without taking emotionally driven decisions.
Not Having Savings
Saving an adequate amount is fundamental as it helps during unexpected emergencies and expenses. They also provide the necessary capital for making investments.
Not Committing Time
It’s imperative to allocate some time to review your portfolio regularly and rebalance if necessary. Regular portfolio review helps with being updated with changing market conditions. Make sure to review the portfolio at least once every 6 months.
Avoid making the above mistakes to optimize the returns on the investments, and maximize the wealth.
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