The Buyt Desk
Caution and planning are two important words when it comes to finances. Everyone works towards earning a good amount of money to enjoy life to the fullest. Earning an income is one thing, but creating wealth should be the aim. Investing in the asset class best suited for you, investing in diverse asset classes, and having well-defined financial goals are good practices for wealth creation. You may commit errors, learn from the experience, and alter your investment approach. Nonetheless, it would be wiser to learn from the mistakes of others.
Let us have a look at what are the mistakes commonly made by investors:
Investing without goal setting and risk assessment
How can you achieve something when you do not know what you wish to achieve? At the beginning of your professional life, you may have set your eyes on a motorbike. After few years, the aim would have shifted to owning a car. As you set a goal, you work towards achieving it, and eventually, your hard work bears fruit. In the same way, you cannot invest your money wisely unless you know what you wish to achieve. Going for a vacation requires an investment option that does not have a lock-in period and has high liquidity. While buying a house requires you to invest for a long period, at least 5 years. In short, your financial goal determines your investment strategy.
Another deciding factor for choosing an investment product is your risk appetite. In case you have more than one source of income, your risk-taking capacity will be higher. Investment products involve different risk levels. For instance, equity mutual funds are riskier than hybrid mutual funds, which are riskier than debt mutual funds. Knowing how much risk you can take is prime for any investor.
Trying to recover the original cost from a loser
It is wise to know when to get in and when to get out of the market. Supposedly, you choose a share or fund but it starts going in a loss, and eventually, its value erodes below the original cost. It would be a wise decision to exit that fund/share than accumulating more loss. You are losing money daily by waiting for that fund to jump back to the original cost because its NAV (Net Asset Value) is definitely lower than when you made the purchase. Instead, if you redeem those units and invest the same money even if in a tax-saving FD, you will receive 6-7% annual interest. Other than fixed-income investment options, most of the investments are fraught with some risk of losing the capital. This brings us to the next investing mistake.
Investing all the money in the same asset class
Keep a balance of high liquidity and low liquidity, medium risk and zero-risk, long-term and short-term investment products in your portfolio. A high-risk investment product can deliver higher returns in the long run, while a low-risk investment product will give you lower but stable returns. Sticking to a single asset class means either running a risk of losing the money altogether when the market is down or losing out at least 3-4% of the returns. A diverse mix in your investment portfolio balances out the pros and cons of every product and creates wealth for you.
Following the herd
The returns of their friend’s investments, new developments in the market, or advice by investment gurus, attract the attention of investors. As a result, some of them switch from one investment product to another quite too frequently. This is a blunder. This leads to loss of money in terms of exit loads and premature closure penalties. This practice will keep delaying the achievement of your financial goals. Market-linked investment options grow to a considerable amount in the long-term. Withdrawing from them before they achieve the maximum growth potential will not provide high returns. Thus, the very purpose of the investment is forfeited.
Withdrawing your investment when the market crashes
The NAV of a unit of mutual funds is determined in the share market because of many factors. When the NAV of the units reduces at the time of low tide, some investors make the mistake of withdrawing their investment. They forget that the market follows a cyclical pattern of growth Recession of 2008 led to a market crash but eventually, the market recovered. Usually, experts invest when the market is down but has the potential of coming back strong. Do not fear for your investment when the market is going down and wait for the controlling factor to normalize.
Prepare a well-thought investment plan to reap the maximum value from your investments. Consider your income, retirement plan, financial goals, liabilities, and risk appetite to chalk out the plan. Research well about the different investment options, their terms and conditions, and their historical market returns. It is best to seek help/advice from a certified financial planner to determine your investment strategy.
