5 Steps To Avoid Investment Mistakes
The sole intention of investments, in the long run, must be to build wealth and that too the right ones.
We all have our inhibitions in taking the right decisions in life, and it is no different when it comes to investing either.
Before investing, it must always become a habit to choose the right ones to substantiate the wealth and time committed, no matter how big or long the investment is. Refraining from investments is a bad idea because you would lose out on the benefits in the latter part of your life.
Here are 5 handy tips to invest wisely.
Step 1: Stop Postponing
One of the most common mistakes observed among people is waiting for long periods to begin investing. For instance, when the market is bullish, people wait for corrections. However, when the stock value is on the downside, people wait for the value to fall further. Postponing can prove to be an obstacle and reduce the chances of accumulating wealth.
Solution: Consider lining up investments to your goals. Imagine, to build a retirement corpus of say for 30 years, the fluctuations in the market conditions shouldn’t influence your investment thought process. Hence, it is prudent to start investing without wasting time further and hold on until you achieve the goals.
Step 2: Betting Big On Recent Returns
Once you have begun investing, it’s a natural tendency to pick investments that have been profitable in the recent past. Investing in a mutual fund or stock due to its recent outperformance and chasing it expecting the same might not always end well.
Solution: Study and analyse how a stock or mutual fund has performed in different market conditions. It’s a no brainer that most of the investments do well when the markets are rising, but the great ones will stand out even in tough times. These are the investments to be chosen as protecting wealth is equally important as building it.
Step 3: Stop Stuffing All Eggs In One Basket
A common misconception among investors is to stuff all eggs (funds) into a single basket (investment portfolio). However, it must be noted that holding too many investments of the same kind may not add up to an investor’s portfolio.
Solution: Diversifying or investing in different types of instruments is the key. Invest across asset classes (equities, bonds, real estate), styles (growth, value, passive), market cap (large-cap, mid-cap, small-cap), and sectors and industries (FMCG, pharma, technology). It is necessary to diversify as all investments do not perform well at the same time.
Step 4: Stop Over Analysis
Understandably, keeping track of the performance of your investments on a daily basis can’t be avoided, but over-analysis can be futile. Most investors judge their decisions on short-term fluctuations instead of long-term goals.
Solution: Check how your investment portfolio is doing intermittently, but not too regularly. For most long-term investors, checking once or twice a year would be ideal. Monitor the performance of the portfolio every six months or annually and buy, sell, or rebalance decisions accordingly.
Step 5: Stop Being Emotional
There is no room for emotions in investments as it will only harm and not better your decision-making capability. Two such feelings that can control your investments are fear and greed. While fear can prevent an investor from investing, greed can encourage the investor to redeem instead of holding.
Solution: Logic must prevail over emotions, and the focus should be diverted towards goals and objectives. Irrespective of how the markets are doing investing should be continuous.
Mistakes are part of the learning curve making you realise that it’s fine as long as it was not deliberate. Arriving at a hasty decision of pulling out of the investments can be detrimental to better returns; so hang on and reap the benefits when they mature.