Most of us invest without any planning.
When we see that the fixed deposit rates are higher we invest in fixed deposits. When we see that the stock markets are on a roll and going higher and higher, we buy shares. When we see that everybody is saying that a mutual fund has given outstanding returns in a year, we buy that fund. When gold rates are going higher and higher every day, we curse ourselves for not buying it earlier. When a stock IPO or a bond is issued and everybody is applying, we also do the same. And with the numerous calls from hardcore telecallers, we find it hard to avoid them and ultimately end up in buying an insurance product without any previous plan.
The result of such unplanned investments is however not always bad. But it results in an unnecessary financial burden, which becomes difficult to carry in the long run. Hence the unplanned investment in a fixed deposit may result in good returns from it, but overall low returns. An unplanned investment in the share market or a mutual fund results in a loss and getting stuck for years. An unplanned investment in an insurance product results in lapse of the policy after a few years.
As an intelligent investor we should follow a guideline to investing, ignoring the calls from the telecallers, friends, colleagues and our own lust for more profits. Let’s see the 5 common mistakes that an investor commits. Here they are:
Not Having An Objective. We should have an objective, a goal, for our investments. Goal based investments results in the realization of our future dreams. If we have a goal of buying a house or putting our child into a medical school and plan our investments around that, we have a good chance to make that happen in the future. Many of us dream of such things, but never plan their investments to meet that goal.
Wrong Timing. This is the most common of all the mistakes. When making an investment one should pick the right moment. No, I am not talking about “shubh mahurats” or auspicious timing here, I am speaking of the right economical timing. When the economies are not doing good, there are bad economic reviews everywhere and the companies are in doldrums, it’s a good time for an investment. Blue chip stocks are available on “sale”, fixed deposit rates are hiked due to higher stock market risks and high inflation, real estate prices are attractive due to slump in demands – these are excellent times to invest in these instruments. However, remember that investment timing varies for different types of instruments as each of these react differently in a situation.
Over Investing. People do not allocate their money while investing. An allocation is necessary to spread the risk of investments in different instruments. This allocation should be made with regard to the age and risk profile of an investor. If one invests 70% of his annual funds into shares and the rest in fixed deposits, in his 40s, he is taking a big risk. If a salaried person, invests 80% of his monthly salary in fixed deposits only, is not giving his money a good scope to grow. Over investing is either “putting all the eggs in one basket” or investing all the time. I know people who buy shares almost daily saying that they are investing for the long term. It is critical to understand that investments should be done in an “investment window”, an opportunity, which comes once in a while; not all the time.
Not Researching. I know that people are computer-savvy these days and they would certainly research before committing. But how many of us go beyond the tips and research reports to pause and think that these are genuine and not some marketing ploy? Internet is a fantastic tool to research, but there are good sites, which steers an investor in the right direction and there are marketing sites, which in the name of providing research, review and comparisons, try and promote their products. I am not saying that all of these sites are bad or promoting only, but many of them actually are. A research should be based not only on what others say, but also taking one’s own situation into consideration and applying a common sense judgment over it.
Not Recording. Although most of us do keep records of their investments, but these seldom reflect the true net-worth or whether an investment is keeping with the plan or not. We keep records for the sake of filing our Income Tax returns only. A proper record should reflect one’s net worth, net returns from investments, net income, net expenditure, etc., so that one can plan for the future and keep an eye whether the investments are doing good or not. There are many modern softwares which does all this and more and I will discuss about them in the near future.
These 5 top financial mistakes should be avoided if you are going to make a lot of money in the future. You may be earning a lot of money by getting a handsome salary or having a great business, but it’s when you avoid these mistakes, that you have a good chance to survive in the long run called “ life”.