Everyone knows that money needs to be invested somewhere and not just saved. Now the only question to be answered is how and where to make the investment. And usually what happens is majority of people are not able to find the answer and ends up committing mistakes. Like everything else, we make mistakes even while investing.
A lot of investment decisions are made on occasions such as a coffee break with a friend. Often friends tell us about their recent investments and suggest us to do the same. And we simply listen and follow them. But is yours and your friend’s financial goal same, is your risk bearing capacity same as that of your friend. No, it’s not the same. You as an individual will have different goals, ideas and responsibilities as compared to any other individual.
Many a times, a friend or a relative comes up with an offer to buy insurance/mutual funds. You are being told that the investment plan being offered is the best product designed and created just for you. And you buy it either because you believe this friend or relative or because you feel an obligation that you cannot say no. Also, you may just pick a product because you heard that it is good and make random investments. But, again, have you considered your goals, objectives and time frame of investment? Are you investing wisely? Knowing what common investment mistakes are regularly made by other investors can help prevent them happening to you. Most common investment blunders are:
1.Investing without a clear plan of action
Many fail to take the time to think about their need and financial goals before investing. You should decide whether you are interested in income stability or growth or combination of both. So, determine your investment goals then, depending on your time frame and your risk tolerance, select the investment avenue with objectives similar to yours.
2. Forgetting about inflation
While you may be aware that the cost of goods and services is rising, but tend to forget the effect inflation will have on investments. Most of the people focuses on nominal return instead of the real return. If ignored, inflation will eat up your savings and depreciate the value of your investment.
3. Putting all eggs in one basket
When it comes to investing we do not give importance to diversification. Although we know that we should not put all our eggs in one basket, often we do not follow it. Diversify your investment amongst different asset classes. When you diversify, you do not rely only on the performance of one asset. Instead, the aggregate returns from different assets gives you better portfolio performance.
4. Investing too little too late
Most people these days have too many monthly expenses and planning for their future is not the top priority. Irrespective of age or income, if you do not place long term investing as your top priority, you may not be able to meet financial goals. The sooner you start, the less you have to save every month to reach your goals.
5. Very conservative approach
Because of the fear of losing money, many people tend to rely heavily on fixed-income investments such as bank fixed deposits and company deposits. By doing this, however, you expose yourself to the risk of inflation. Consider diversifying with a combination of investments. Include stock funds, which may be more volatile, but have the potential to produce higher returns over the long term.
These are some of the common mistakes made by most of us. If you would have been investing for a few years then you would have been learnt most of these. If not, it is better to learn soon.
Written by: Charanjeet K Laungia, Certified NISM Mutual Fund Advisor, Intern at Investocafe