Everyone knows that money needs to be invested somewhere and not just saved. Like everything else, we make mistakes even while investing. Let’s discuss the 8 most common mistakes made by us while investing in various products.
Mistake 1 – Buying on obligation
Quite often one of our friends/relatives comes to us with an offer to buy insurance/mutual funds. They tell us that this is the best product designed and created just for you. And you buy it either because you believe him or out of an obligation that you cannot reject him. This is a common scenario in life insurance. Your friend/relative would be an agent of a life insurance company and would approach you whenever he is short of his target. You decide to help him by paying premium for an insurance policy. You ignore the fact that you had missed out on an opportunity to buy a good financial product which suits you because you have invested somewhere else.
Mistake 2 – Taking Free advice
I have learnt that a lot of investment decisions are made during a coffee break with your friend. He tells you about a product in which he has invested a few days back. He also says that you should be investing in it for your good. Without even knowing about it properly, you make your mind upon buying it. You are happy that you have received an advice free of cost. However, this free advice could cost you in the long run. Before accepting his advice, did you think of his skill set/knowledge in suggesting you this product?? Is he qualified enough to advice you? It’s better to take some time to research a good financial planner and pay him fees for his advice.
Mistake 3 – Investing Randomly
A lot of times you may just pick a product because you heard that it is good. It is a random investment. Have you considered your goals, objectives and time frame of investment? If you did not, don’t worry. Many of us do not do it either. You might have picked a mid/small cap fund with high risk without knowing that it is for a goal which is 6 months away. Had you thought of that goal before investing, you would have picked a short/ultra short debt fund.
Mistake 4 – Investing without Research
One thing which always lures us into purchasing a financial product is returns. Our eyes lit up whenever we see returns of 10, 12 or 15%. There are products which have given these returns and you might have chosen one of them based on past performance. But, is returns the only criteria for selecting a product? Shouldn’t we also know about aspects such as fund manager, taxation, liquidity, risk, etc. Doing proper research is necessary before investing as you would know the pros and cons of a product beforehand. It will also help you make informed decisions.
Mistake 5 – Not Diversifying
I know that you might have read this phrase umpteen times – ‘Don’t put all your eggs in one basket’. The phrase is perfect from an investment perspective. You need to diversify if you are serious about your goals. A long term goal such as retirement cannot be achieved through a debt product like FD/RD. In the same way, an equity fund does not suit a short term goal such as vacation after 5-6 months. A tasty recipe is a mix of different spices. In a similar way, you need different kinds of products in your portfolio to derive the best from it.
Mistake 6 – Not having patience
Patience is definitely a virtue. Great inventions were not made overnight. Some investments are the best only when held for longer periods. A common mistake by most of us is that we sell a product if it has gone down after a few months of buying it. You knew that the product was volatile and hence might fall in the short run. Instead, emotions take over and you forget that you had done enough research on it and picked a good financial product. Many investors shy away from mutual funds for the same reason. Next time someone talks about mutual funds, they tell him/her to stay away from such products as it failed in their case.
Mistake 7 – Trying to time the market
Timing the markets is something which even experts have failed to achieve. According to me, trying to time the markets is like going on a wild goose chase. Moreover, traders should be doing it, not investors. If you want to be an investor, invest in a product according to its merits and demerits. There might be occasions such as recession when even fundamentally good stocks also go down. But, it’s just a matter of time. If it’s good, it will bounce back. Even the best of equity mutual funds have gone down when markets were down. But, they managed to weather the downside and delivered pretty good returns later.
Mistake 8 – Staying conservative when young
The final mistake which I wanted to state is that a lot of us try to be conservative when we are young. It could be because our elders have advised to be so or because of our past couple of experiences. This is a time when we need to be aggressive. Important goals such as children’s education, children’s marriage, house, retirement, etc would be far away. Conservative products cannot take you to these goals. You might have heard about the power of compounding. This is what will take you to such goals. Take risks by investing in equities. In the long term, equities deliver returns of 12-15%, which no other product can. However, take note of the term ‘long’. You may have to wait for 10 years or more to achieve such high returns. Of course, there are other factors such as portfolio review, re balancing, etc which you need to take care of in this period.
These are some of the common mistakes made by us. If you had been into investing for a few years, you would have already learnt most of these. If not, it is better to learn soon. If you have noticed any other mistakes made while investing, do share with us.