Ways to avoid common investment mistakes

Common Investment Mistakes

While making an Investment decision, it is important to learn from the best, but it is equally important to learn from the worst. Mentioned below are the common mistakes that investors do while doing investments.

  • Expecting too much or using someone else’s expectations:
    Investing for long term involves creating a well-diversified portfolio designed to provide the optimum level of risk mitigation and return under a variety of market scenarios. But even after designing the right portfolio, predictions cannot be made as to how will market perform or what returns will market give. Hence, its important not to expect too much and to be careful while figuring out what to expect. Nobody can tell what a reasonable rate of return is without understanding your requirements of financial goals, risk appetite and asset allocation.
  • Not having clear investment goals:
    “If you don’t know where you are going, you will end up going somewhere else” – this hold true for Investments as well. From planning investments, to using strategies, building portfolio and individual stock purchases can be figured out once you are clear with your life goals as well as financial goals. Most of the investors focus on the latest investment fad or on maximising investment returns in the short term instead of designing a portfolio that has high probability of maximising investment returns for long term goals.
  • Failing to Diversify enough:
    The fundamental to create a portfolio that balances the optimum level of risk and return ratio in every market scenario is adequate Diversification. Investors often believe they can maximize returns by taking large exposure in one security or sector. But when the market movements are in contradiction to such a concentrated investment position, this position turns out to be disastrous. Similarly, too much of diversification and exposure can also affect the performance of the portfolio. Hence, an investor is required to go for a balance situation where a portfolio is diversified in accordance with his risk appetite and financial goals, in case of he needs help, he may consult a professional financial advisor.
  • Buying high and selling low:
    The fundamental principle to make profit out of investments, is buying at low and selling at high. Still knowingly or unknowingly, the investors often take opposite positions. Such positions are however a result of fear or greed, which donot let the investors make rationale decisions. In many cases, investors buy high, trying to maximize short-term returns instead of achieving long term goals. A focus on short-term leads to investing in the noise – following the crowd or investing in asset or a strategy that was effective in the near past. Either ways, once an investment becomes popular, it becomes difficult to have an edge determining its value.
  • Trading Too Much and Too Often:
    Patience is a virtue that counts, while investing in stock markets. It takes time to reap the benefits of your investments and asset allocation strategy. Continued modification of investment strategy and portfolio composition will not only reduce the returns through greater transaction charges, but also exposes an investor to unanticipated and uncompensated risks. An investor should be sure that he is on the track. Use the impulse to reconfigure your investment portfolio as a prompt to learn more about the assets you hold instead of using it as a push to trade.
  • Paying too much in fees and commission:
    Investing in High Cost funds or paying too much in advisory fees is a common mistake because even a small increase in fees can have a significant effect on wealth over the long term. Before opening an account, be aware of the potential cost of every investment decision. Look for funds that have fees that make sense and make sure you are receiving value for the advisory fees you are paying.
  • Focusing too much on taxes:
    Making investment decision on the basis of potential tax consequences is a bit like the tail wagging the dog, most investors make this mistake. You should be smart about taxes, tax loss harvesting can improve your returns significantly. It is important however, that the decision to invest in a particular security is driven by the potential that the security posses and not its tax consequences.
  • Not reviewing Investments Regularly:
    If you have invested in a diversified portfolio, there are chances that some stocks will go up while others will go down. At the end of a quarter or a year, your portfolio will start looking quite different. Don’t get too far off track, keep monitoring your portfolio at regualr intervals, say at least once a year to make sure that your investments still make sense for your requirements and that there is a need for rebalancing or not.
  • Taking too much too little or wrong risk:
    Investing involves taking some level of risk in exchange of potential returns. Taking too much of risk can lead to large variations in investment performance that may be outside of your comfort zone. Taking little risk can result in lower returns to achieve your financial goals. Before making an investment, make sure that you are aware of your risk appetite, emotional stability and life goals.
  • Not Knowing the true performance of your investments:
    Most investors are not aware about how their portfolio of investments have performed over a period of time, what they know is just the headlines or more so just couple of stocks in the portfolio have performed. This is not enough. As an investor, you have to relate the performance of your overall portfolio to your financial goals, to check whether you are on track after accounting for costs and inflation.
  • Reacting to the Media:
    There are plenty of 24-hour news channels and their social media handles which keep on showing tradable information. It will be foolish for an investor to try to keep up. The key is to parse valuable information out of all the noise. Successful and seasoned investors gather information from sources available independently and do proprietary research and analysis. Using news from such 24-hour news channels as a sole source of analysis for your investments is a common mistake as by the time the information becomes public, the same has already been factored into market pricing.
  • Chasing Yield:
    A high-yield asset is a seductive possession. Everyone would love to try and maximize the amount of returns on investments. But always remember one simple fundamental, Past performance are no indications for future performance, also the high-yield assets carry highest risks. Focus on the Whole Picture instead of getting distracted while disregarding risk management.
  • Trying to Time the Market:
    Timing the market might be possible, but its way too hard. For people who are not well-trained, trying to make a well-timed call, can be their undoing. Investors are better off contributing regularly to their portfolio rather than trying to trade in and out in an attempt to time the market.
  • Neglecting due diligence:
    There are many databases available to check whether people managing your money have the training, experience and ethical standard to merit your trust. Check them. Ask for references and check their work on the investments that they recommend. The worst that can happen is that you trade an afternoon of effort for sleeping better at night. The best to happen is you can avoid the next “Madoff” scheme. Any investor should be willing to take that trade.
  • Working with the wrong adviser:
    An investment advisor is a person who partners with you in your journey of achieving investment goals. The ideal financial professional or financial service provider not only has the ability to solve your problems but shares a similar investment philosophy and life goals. The benefit of taking extra time to find the right adviser far out weigh the comfort of making a quick decision.
  • Letting emotions get in the way:
    Investments test your emotional quotient that can impede decision making. Don’t let the immensity of emotional questions get in the way. A good advisor will help you construct a plan that works, no matter what what the answers to your emotional questions are.
  • Inflation – Top of the list:
    Donot focus on nominal returns, instead, focus on real returns that take inflation into consideration. This means look at the investment you make and compare its returns after the fees, taxes and inflation. Even if the economy is not in the massive inflationary period, some costs will still rise. It is important to remember that what you can buy with the assets you have is in many ways important than their value in rupee terms. Inculcate the discipline of focusing on what is really important : your returns after adjusting for rising costs. Never neglect inflation, it should always stay on top of your checklist before investing.
  • Neglecting to Start or Continue:
    Individuals often fail to start an investment plan due to the lack of knowledge of when, where and how to start. Similarly, they also stay inactive as a result of lethargy or discouragement over the losses on investments that they might have incurred previously. Investment management is a disciple that is simple but requires consistency in efforts and analysis to become successful.
  • Lack of Control over what you can:
    Individuals can’t predict future but can surely act to shape it beautifully. Similarly, one can’t control the markets but can save more money and regularly invest it. Continually investing capital over time can have huge impact on wealth accumulation as well as return on investments. It surely lets you achieve your financial goals comfortably.
Note: Wherever required, inputs and insights are taken from CFA Institute’s Website
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