Last Updated on December 29, 2021 at 4:50 pm
Personal finance is personal and in general, it is incorrect to claim X or Y action as a mistake. That said, being judgemental (almost always with incomplete information) keeps human society together and I think it reasonable to list a few actions as unproductive and hence unnecessary. Harpring on these can be considered a mistake. Here are 15 investing mistakes in my opinion that everyone should avoid.
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15 list of common investing mistakes
- Wrongs ideas about averaging
- Waiting for a suitable time to invest Dip Investing
- Expecting a return from market-linked investments!
- Overconfidence based on past data
- Feeling the need to know more about every new NFO
- Suffering from small exposure syndrome
- Not having yardsticks for judging big or small
- Assuming tracking investments is important!
- Assuming Information is power
- More risk = more returns
- Short term losses do not matter, long term will be ‘okay’
- Locking up money is good else it will get spent
- Assuming investing in stocks is better than mutual funds
- Assuming we can understand fund manager decisions
- Market timing is not possible
- Market timing will lead to more returns
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1 Wrongs ideas about averaging
Investors tend to buy more of the same thing and call it averaging! If risk reduction is the aim then we will have to buy different products (return enhancement is never possible if we spread out). So keep your portfolio lean and mean. Less is definitely more and if you want help in reducing the number of funds that you hold, you can consult this video
2 Waiting for a suitable time to invest Dip Investing
First of all, buying on market dips without changing existing asset allocation is useless. See: buying on market dips how effective is it? Second of all, if you wish to time the market then do so with a method. Try: Nifty Valuation Tool: Find out if the stock market is expensive or cheap in multiple ways
3 Expecting a return from market-linked investments!
You might be surprised by this, but sadly it is a fact that returns from any market linked product fluctuates so much that it is not possible to expect returns. Instead, follow a goal-based approach to reducing risk. See: How to reduce risk in an investment portfolio
4 Overconfidence based on past data
People look at the last few returns and assume the future will resemble this. Be it equity or even a liquid fund, this is not true. Past risk is a minimum guarantee for future risk, past returns are not.
5 Feeling the need to know more about every new NFO
Most NFOs have nothing new and can be safely avoided. The only reason one can buy an NFO is when they have no other fund! Buy a new product only if you have a new need!
6 Suffering from small exposure syndrome
Most investors do have a sense of small or big. For example, many want to save Rs. 50,000 from taxable income by investing in NPS and defend how it is a suitable product. Sadly they would need to invest 3-5 times that amount for retirement. If they worried more about where that went, tax saving will become tertiary.
7 Not having yardsticks for judging big or small
For all investment decisions and numbers, a benchmark is necessary. For example inflation, tax and risk are benchmarks for return. Portfolio weight is a benchmark for deciding the performance of a single instrument.
8 Assuming tracking investments is important!
Many make the mistake of searching for an app or tool where they “see” all investments. This leads to more harm than good. You only need to “see” your investments once a year. A simple spreadsheet is enough for that.
9 Assuming Information is power
Again less is more. And more is moronic. The problem with excess information is the need to process it. Most people either do not have the ability or the time to do it. So an information diet is a simple solution: The Information Diet: How Less Information Can Make us More Informed
Stay away from all news, blogs (esp mine), social media related to finance. Give a chance for your money to grow in peace without your interference.
10 More risk = more returns
Sadly this is a big misconception. Investing more in mid and small caps will not make you rich as often as it would make you miserable. Strike a balance and have a well-diversified portfolio with large caps as the core. This is what I prefer: Using Balanced Mutual Funds As The Core Equity Portfolio Holding
11 Short term losses do not matter, long term will be ‘okay’
People assume markets will be volatile in the short term but will always move up over the long term. Sorry, not true at all.
12 Locking up money is good else it will get spent
If you lock up all your money in instruments like the NPS assuming it will bring more discipline, it can hurt you bad. A good investment has four components: risk, return, tax and liquidity. A good balance in the portfolio is crucial.
13 Assuming investing in stocks is better than mutual funds
It is possible for a direct stock investor to beat a mutual fund manager, but not probable (if our sample size is big enough). You can give it a try but do assume that you will be successful.
14 Assuming we can understand fund manager decisions
Back seating driving a mutual fund is a terrible mistake as we do know why a fund manager purchased a security and why she sold it. So please do not waste time.
15a Market timing is not possible
This is propaganda by mutual fund companies. Is more than possible, just that it is not necessary
15b Market timing will lead to more returns
Market timing is for lowering risk. Return enhancement is a possible side effect.
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