Seven investing mistakes that cost money and worse, time!

Published: April 30, 2021 at 11:39 am

One of the most valuable life lessons we learn is the irreversibility of time. The arrow of time moves only in one direction, and every hour that has passed has passed on forever. Here are seven investing mistakes that can cost us money and, worse, time after we start taking personal finance seriously.

1 Trying to make for lost time in a hurry: Many of us do not take personal finance serious until our early or mid-thirties. Once we do, we wish to make up for lost time and assume further time spent analysing our needs and drafting an investment strategy is a further waste of time.  Having wasted years, another few weeks of listing our requirements and suitable options for these will not make much difference. In fact, not planning would only result in more mistakes. There is no rush! As they say in the armed forces, slow is smooth, smooth is fast.

2 Lack of inertia. We often make the mistake of assuming inertia refers only to a lack of motion or, in this context, a lack of action. Inertia also refers to a state of constant motion. Not doing anything is harmful to personal finance. Constantly changing plans is also harmful. Many investors, after they draw up an initial plan, spend years modifying it!  They are influenced by every new product, every new opinion and assume it needs to be incorporated into their plan.

The basics of investing have not changed for centuries. Investors can take about three months to figure out if they can do it by themselves or need help from a SEBI registered fee-only advisor. Then they can take three months to do it themselves or search for a suitable advisor and pay for a plan. At the end of this six month period, a full investment strategy should be ready. And once it is ready, inertia is important. I personally value inertia after plan creation and execution as the most important personal finance trait.

3 Process, first, products later: Out of the 10-11 investors who asked me, “Can I invest in the new NFO from Parag Parikh AMC?”, not one was able to define a need suitable for the product (yes, it ought to be the other way around, is it not?!). Our investment strategy cannot depend on new products! And btw, “trust” in an AMC is a bit like credit risk. It is largely based on ignorance and naivete.


4 Confusing simplistic with simplicity:  Your job is not done after “covering the basics” of life insurance,  health insurance, a couple of sips here and there, some EPF, some PPF, some US equity “exposure”, and a couple of attempts at using a goal calculator. From not knowing where to start, the “basics” have just taken us to the starting point.

We need to learn “complicated stuff” like asset allocation, rebalancing, benchmarking investments with our needs, and product review. An investment strategy should be reviewed at the portfolio level first. Instead, we only talk about this fund has X return and that fund Y return.

There is no escape from this. Else our simple plan would fast become simplistic. More time is wasted reading again and against the same nonsense about the power of compounding, the importance of beating inflation and equity being well-suited for long-term investments than the time wasted doing nothing.

5 Unable to overcome regret: Do we fear loss or bad decisions, or do we fear the regret that would suffocate us as a result of these? I often wonder. Being emotional about logic, about the big picture is the only way I can fight regret. When I started and saw daily losses, I had to remind myself about the importance of financial freedom after retirement and that it is necessary to endure the pain of loss. We must come up with a system to eliminate regret as soon as possible.

6 Forgetting everything is a cycle: I have seen people in AIFW say, “when liquid funds give me 9% return, why do I need anything else?” and then see the tune changed to, “but liquid funds are only giving 5-6% returns, how can I get more?”. Everything is cyclic. From long-term SIP returns in our great friend equity to star ratings to interest rates to real estate returns, just about anything. If we judge something when it is at the top of the cycle (e.g. gilt fund or gold returns), after we invest, we will encounter the bottom and vice-versa. Everything is cyclic, but that does not mean we can define a frequency and know when to enter and exit. Tough luck!

7 Valuing commonsense more than data!  Someone says, buy at  X Nifty level and sell at Y level, or someone says second Saturday is the best day for SIP, or a weekly SIP does more frequent “averaging”, we find it appealing. It sounds like commonsense, we tell ourselves. Practically none of these notions stand the test of rigorous backtesting. At the very least, they will not work all the time. No one knows whether they would work or not when we start investing.

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
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