Do not make these 15 investing mistakes!!

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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

  1. Wrongs ideas about averaging
  2. Waiting for a suitable time to invest Dip Investing
  3. Expecting a return from market-linked investments!
  4. Overconfidence based on past data
  5. Feeling the need to know more about every new NFO
  6. Suffering from small exposure syndrome
  7. Not having yardsticks for judging big or small
  8. Assuming tracking investments is important!
  9. Assuming Information is power
  10. More risk = more returns
  11. Short term losses do not matter, long term will be ‘okay’
  12. Locking up money is good else it will get spent
  13. Assuming investing in stocks is better than mutual funds
  14. Assuming we can understand fund manager decisions
    • Market timing is not possible
    • Market timing will lead to more returns

Do not make these 15 investing mistakes!!

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

Holding too many mutual funds? Easily trim your portfolio with these steps

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

Do not expect returns from mutual fund SIPs! Do this instead!

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.

Are you suffering from Small Exposure Investor Syndrome?

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.

Are you suffering from Small Exposure Investor Syndrome?

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

Large Cap vs Mid Cap vs Small Cap Funds: Which is better for the long term?

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.

This is crucial for investing success! Be sure to understand what sequence of returns risk is!

What is sequence of returns risk?

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

Want to time the market? Here is how you can do it right!

15b Market timing will lead to more returns

Market timing is for lowering risk. Return enhancement is a possible side effect.

How to time the market with Index PE

Video Version

Do not make these 15 investing mistakes!!

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman is the co-author of two books: You can be rich too with goal based investing and Gamechanger. “Pattu” as he is popularly known, publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis, including a robo advisory template for use by beginners. Contact information: freefincal {at} Gmail {dot} com He conducts free money management sessions for corporates (see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints.

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1 Comment

  1. hello Pattu Sir,
    First of all you have been great support in understanding world of mutual funds personally to me, so thousand thanks for that.

    I have one question regarding equity oriented funds in general. While analysing any equity fund , to decide whether to invest in or not, i generally also check its stock portfolio, meaning concentration of stocks across industrial sectors and fund concentration in top holdings. e.g. I look at percentage of stocks held in top 3 and 5 sectors against total no. of stocks, and also fund concentration in top 3 or 5 holdings. (though I am aware that fund manager do tend to alter fund allocation time to time, by buying or selling different stocks). I tend to avoid funds with portfolios highly concentrated in only top 3 holdings and 1 sector, and choose those with bit more diverse portfolio, hoping it would lead to less volatility. I see most of equity funds with their holdings concentrated in finance domain (upto 40% in some funds) & i tend to avoid them only for that reason.

    But I don’t recall this point ever touch-based or highlighted in your articles or videos. So my question is, whether is it really important aspect ? (because I may be unnecessarily stressing upon this point in my analysis). I might be missing out on some good funds, just because of my this preoccupied notion of stocks diversity point ? I would be really obliged, if you could address this query. Thanks a lot.

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