The world of investing can be both exciting and very rewarding— but it’s not without its potential pitfalls. Making mistakes is a part of the learning process, but quite often the lure of making a quick buck can lead us to losing the much needed investment perspective. So it’s important to arm yourself with as much information as possible to make sure you choose the right investments. Here are some of the common mistakes many investors make and how you can avoid them.
It is difficult to arrive at the best time to buy (and sell) shares and funds. So a sensible investment strategy can be to develop the habit of investing money each month regardless of market conditions and set up a systematic investment plans (SIP). By drip feeding your money into the market each month, known as rupee cost averaging; the effects of the highs and lows are smoothed. You buy fewer shares when prices are high and more when prices are low. The same is the case if you are investing in units of mutual funds.
Not doing homework
Investing without fully understanding what you are buying is akin to setting out on a treasure hunt sans the map. This means you won’t appreciate the possible risks and rewards. Make sure you look under the bonnet of where your money is going. Look at what the fund invests in and its objective to give you an idea of the returns and level of risk. You can study performance figures of funds you are interested in which will allow you to gauge how the fund - and investment team - has fared so far.
But don’t be entirely guided by them. Past performance is no guidance to future performance. The same approach can be adopted when investing in stocks. Remember that big is not necessarily best, which means stocks and funds that attract the largest amount of money may not necessarily always be the best of safest of bets. Understand what drives performance and keep track of that.
There are some occasions when it can be a good idea to consider putting larger sums into the market, if you have money to spare. For example, if you have a long-term investment horizon you may have the opportunity to pick up good investments at cheap prices after a heavy fall in the market, benefiting from the panic selling of others. Use such opportunities to your benefit by investing in the markets when others are fearful or are unsure of which way the markets will move.
When investing in stock markets, don’t be a short-term investor. Invest in equities for the long term and have a game plan when investing. Adopt the principle of buy right and hold tight to see your investments grow leaps and bounds. It may be tempting to cash out with 20 per cent gains on your investments, but for your investment to become a multi- bagger, hold on to your investments for the really long term. Those who stayed invested for periods of 15-20 years have stories to tell of the wealth that they accumulated over this time.
Missing on diversification
Diversification is crucial to any investment portfolio. When you hold a basket containing a large number investments in different asset classes, losses from any single investment shouldn’t have too large of an impact on the value of your portfolio as a whole. Your overall returns should be also be smoother as in conditions when some asset classes tend to perform badly, others tend to do well. To build a well diversified portfolio you could consider investing in a blend of equities, bonds, cash, and alternative asset classes such as property. A common mistake is by selecting a large number of funds or stocks that are popular, resulting in investment holdings in similar asset classes.
Growth or income?
The return from an investment is made up of a combination of income and growth. With a bit of number crunching it’s clear that income can sometimes come at the expense of capital. So make sure that you understand how taking income from a portfolio could affect your capital over time and remember that any income you take from an investment is not available to generate future growth. This is a common mistake that results in retirees assuming they have a large capital to use. It is also a reason for investors to opt for dividend option of mutual funds than staying with growth.
Neglecting your investments
Investment planning should not be a one off event but part of your overall financial planning agenda. Over time it’s likely that your circumstances change and this may well have an impact on your investment objectives and risk appetite. So it’s important to regularly consider whether any fund holdings you have built up over the years remain right for your needs. Moreover, markets and asset classes don’t all move in a straight line, so over time your exposure to different investments will change.
This means your investments may have become higher – or lower – risk than you actually want. As always, check your asset allocation and if necessary rebalance to reflect your current goals and attitude to risk. You should also keep an eye out for funds that are consistently underperforming. Understand why, and don’t stick with paltry returns for the sake of it.
(A marketing initiative by Open Avenues)