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7 Mistakes To Avoid While Investing

Investing well requires a mix of discipline and endurance. It may appear boring but in the long run you become wealthy and financially independent. Being Financially Independent in turn means that you control your time and as well like to say time is more valuable than money. So how do you succeed in this boring yet exciting journey (yes it is an oxymoron’s statement)?

Here are some common traps that you must avoid :

Mistake While Investing #1: Short term focus

Many people think that investment is till the going is good. And for equity investments this usually means a few months. There is enough data by AMFI that the average holding period for a mutual fund folio is six months only!

Why is this bad:

  • You lose out on putting the eight wonder of the world to your advantage. Yes, it is compound interest.
  • When you cash out, chances are that you make a loss. Thus you destroy wealth, if you carry a trader’s mindset as opposed to an investors mindset.
  • When cash is sitting idle in your pocket (or bank), you might spend it on impulsive buys. And if you don’t spend then, cash sitting idle in the bank is not working hard enough for you.

Mistake #2 – Not having a Defined Goal

When you fail to plan, then you plan to fail. This is true for investing too.A goal helps you clearly plan your cash flows and apportion how much goes into investment and the rest for expenses. This approach inherently limits your expenses and increases your saving ratio.

Why this is bad :

Without a goal people are not motivated to stick on for the long term. And that means repeating Mistake #1 all over again.

Mistake #3 – Not Automating Your Investments

An automated approach such as Systematic Investment Plans ensure that your investments continue no matter what happens. They sock away your hard earned money into productive investments. You are not given the option of deciding whether to invest or not. When combined with Goal based Financial Planning this is a winner!

Why this is bad :

  • When your income hits the bank account and lies idle in your current account, it means that the bank is making more money from your hard work, than you!
  • You tend to spend away the ‘idle cash’ on impulsive buys. In the long run you might be left high and dry when goals like daughter’s education or retirement approaches.

Mistake #4 – Not Diversifying Your Portfolio

There is no free lunch in investments, except Diversification. This is the shock-absorber in your portfolio that steadies returns over the long run. A portfolio with FDs or bank deposits only be eaten away by inflation. On the other extreme, a portfolio with only equity funds may perform well during bull market runs but fall heavily when markets correct. The key is to find out your right asset allocation based on your risk profile.

Why this is bad :

Poor diversification gives low returns and increases the risk of your portfolio.

Mistake #5 – Not reviewing your portfolio

Once you establish a suitable portfolio you must ensure that it is periodically reviewed. This should happen at least once a year. You need to weed out poor performing funds and monitor exposure to various sectors.

Why this is bad :

A reduced return of just 2% can mean a loss of more than 50% over the long run (say 20 years).

Mistake #6 – Reviewing your portfolio too often

The converse is also true. Frequent review of portfolio may lead you to churn it too much thereby reducing the overall return. The best way to invest is to have a patient perspective and not worry too much every day.

Why this is bad :

You repeat mistake #1 as your emotions get the better of you.

Mistake #7 – Not Paying For Quality Advice

Too many people are not aware of the huge cost of commissions over long term. People risk losing 40% to 50% if their wealth. Good quality advice pays for itself many times over.

It is better to know the cost of investing upfront than get fooled over the long run by the “Wealth Management” industry. The traditional model of ‘free advice’ + transaction fees or portfolio % fees is making only the wealth managers and banks rich. A model of ‘reasonable fees for advice’ + zero transaction fees is much more investor friendly.

Conclusion :

Being aware of the 7 mistakes of investments can greatly enhance your returns and make the investing journey highly rewarding. Investment has no silver bullet, there are no major secrets (except for hidden commissions) – so being disciplined and committed is what will get you to your destination!

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Ram Kalyan Medury

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