Investment strategies and portfolio building are skills that tend to undergo constant evolution – with each decision and its results helping refine future plans of action. Not everything works for everybody. Some investors prefer a high-risk game plan, while others prefer medium risk or low-risk investments. Whatever be your strategy, there are certain aspects of investing almost everyone should avoid. Here are some of the most common mistakes committed by people new to investments.
#1 – Failing to research
Often, investors make early investments without adequate research or analysis. Research is the key to every good deal, the lack of which can dilute the potential of your investment. Or even worse, it can ultimately lead to a dead investment.
American investor Peter Lynch said in his book One Up on Wall Street – “Stick with what you understand.” Often, people tend to get lured by marketing buzzwords from financial consultants and go ahead with making investment decisions based on them alone. This is especially true for early investors who’ve just begun their journey. What this results in is failed investments or returns far lower than what they would’ve made with some well researched options. Always do your homework before you invest. Thanks to the power of compound interests, potential gains lost can add up to become a significant amount over the years.
#2 – Lack of (or improper) diversification
Diversification of assets is critical to ensure that there is minimal risk in one’s portfolio and stable returns. Often people do not diversify and stick to single asset classes. Or sometimes, they diversify too much. Holding too many investments in your portfolio will dilute the benefits of diversification.
Your investment basket must comprise of the right asset classes based on your goals and risk choices, preferably including a mix of both debt and equity assets. Being religiously focused in a specific area of the investment market increases your risk exposure. Plus, regular monitoring of your portfolio is as important as the investment decision itself.
For example: if you have all of your investments in a single stock and that stock loses 50% of its value over the course of a year, you would lose 50% of your portfolio. But if that stock only makes up 3% of your portfolio, a massive 50% drop-off won’t affect you as much.
#3 – Focusing too much on taxes
Many investors tend to intensely measure and over-analyse the tax consequences of their investment decisions, often to their own detriment. Although making efforts to help yourself pay lower taxes is a good idea, the taxes you pay on investment gains are usually insignificant in the context of the returns you can generate from a good investment strategy that you build for yourself.
If you get an opportunity to help lower your tax outflow without losing any investment gains, you should, by all means take advantage of it. But if you’re making investment choices primarily to avoid paying a few bucks in taxes here and there, you’re almost guaranteeing yourself a worse outcome. Think big.
#4 – Confusing historical returns with future expectations
It is a natural tendency rely heavily on the past performance of an asset before making an investment, which is understandable – it’s one of the most abundant data points we have when we’re taking a call on where to channel our funds. But it is important to understand that an investment which has fared well in the past in terms of returns, may not necessarily continue to deliver similar returns in the future as well. Sure, it is a good idea to go through the past records of an asset or security, but that’s certainly not the only part of a well-researched strategy. You must take cues from the currently associated characteristics of an investment as well, and the market sentiment in general as well.
To avoid making this mistake, investors should run a well-defined analytical process. Apart from just the historical performance, they must also gauge for investments with low commissions and fees, with appropriate levels of risk, and with a performance that justifies their benchmark.
#5 – Thinking short-term
Investing for a short-term may not give your investments time to grow. This is particularly important if your goal is long-term, such as funding your retirement or college education for your kids. For long-term growth, many investment professionals recommend that it’s essential for your portfolio to include stocks.
For example, the Reliance Mutual Fund has multiple products on offer – liquid funds, equity funds, gold funds, and debt funds. A well-formed long-term strategy should ideally include a diversified mix of all of them, with emphasis on the equity funds for sustained growth.
Allocate your assets wisely so that you have enough money to cover your short-term expenses while simultaneously being able to invest for longer term goals. This will allow you to think for the longer term and not focus on the day-to-day fluctuations of the markets.
Conclusion: Being aware of these 5 mistakes while investing, can amplify your returns and make your investment journey highly successful.