Wednesday, April 25, 2012

Are you making these common investment mistakes?

If you as investor believe that investing is a 3-step process i.e. getting hold of an investment agent, filling up an application form and signing a cheque; then you got it all wrong.

Investing is a process driven approach, and is far more sophisticated. While invest, you should ideally ascertain your investment objective, and thereafter invest in appropriate investment avenues which help you attain the set objectives. Although this may sound a little difficult, it can be achieved by avoiding some very common investment mistakes. While there are galore of mistakes which investors do (while investing) - and the list is endless; we have highlighted below the five most common mistakes and guided what investors’ should actually do.

  1. Investing without a plan

    Well, the first and most critical step while investing as mentioned above, is to outline your investment objectives. Setting an investment objective simply means ascertaining why you would like to invest, along with the financial goal which you have in mind. And mind you, segregating your financial goals into short-term, medium-term and long-term, will help you to invest in a much systematic way. For instance, planning for vacation is short-term, planning to buy property is medium to long-term, planning for retirement is long-term. 

    But through experience we can say, very often investors stumble at the starting point while defining investment objectives; this in turn gets their financial plan in a tizzy. 
  2. Not diversifying well enough

    Diversification is one of the basic tenets of investing. At PersonalFN, we regularly meet clients who have invested a large portion of their hard-earned money in a single asset like real estate for instance, or equity. While such investors may do well during a run-up of a respective asset class, the risk also gets elevated during the downturn of the respective asset class. 

    Thus this highlights the point of how vital it is to put your eggs in different asset classes (such as equity, debt, gold, and real estate). Moreover, diversification is also important within an asset class. So, say while you would like to invest in a respective companies stock (in the equity asset class) for all the robust fundamentals it holds, you should be diversifying your portfolio across stocks, thereby having a better sectoral diversification too. 
  3. Ignoring risk

    Very often many investors select an investment avenue/scheme simply because it provides better returns or is recommended by a friend, family member or agent/broker. We are of the view that it is important for you to take responsible investment decisions, and not be influenced merely on the basis of what your friends, family members or agents/brokers say, nor only the basis of mere performance. 

    Investors should recognise that various investments have varying risk profiles. For instance, stocks/equity funds have a higher risk profile, while debt is relatively low risk. You must select an investment avenue based on whether it suits your risk profile. For instance, a 55-Yr old who is headed for retirement must not take very exposure towards equity, unless he has already planned and created optimal corpus for his retirement. 

    Hence, it is imperative to ascertain your willingness to take risk, or else you would be making an incorrect investment decision, as you may be investing in an asset class or an investment avenue which just doesn’t suit your risk profile. 
  4. Getting married to your investments

    Very often investors get married to their investment portfolio. But this emotional attachment towards your investment portfolio may not be always good to your financial health

    After having formed your investment portfolio in line with your investment objective and appetite for risk, it is vital that you review your portfolio at regular intervals. This will help you not only to identify the duds in your portfolio, but also do a prudent alignment taking into account your investment objectives and risk exposure. 
  5. Timing the markets

    Some investors, being exposed to host of information perceive themselves to be experts. Getting lured by the exuberance created business channels and pink papers, "timing the markets", is the mantra chanted by many. We recognize that it may give you the thrill or a kick; but one mustn’t rule out that the thrill can actually kick you out. Remember a trader is only good until his last trade, as you don’t know what the future has in store for you - good, bad or ugly. Let us apprise you that trading and time the markets, can be hazardous to your wealth as well as health. 

    While many may say that the markets are volatile, and why not play with it; we think that instead of "playing" with the volatility, "managing" volatility. can do well for your financial health as well as physical health. How do you do it? Well simple. Adopt the SIP (Systematic Investment Plan) route of investing, as this help you in rupee-cost averaging (which according to Albert Einstein, is the greatest mathematical discovery of all time) and also power your portfolio, with the benefit of compounding. Thus there’s rational in staying invested to meet your financial goals 

    Put simply, this implies that risk-taking investors must abandon the temptation to get caught up with market highs and lows. Instead, they must work at regularly setting aside a sum of money and investing the same in line with their risk profiles regardless of market fluctuations.                                                         
Source :personalfn

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