Common Investment Mistakes to Avoid
Human beings can make errors or mistakes or errors knowingly or unknowingly. Repeating mistakes is not a good trait, however learning from mistakes and improvising will propel you towards success or atleast help you become more experienced and wise.
Investment mistakes go hand in hand with the investing process. The knack to avoid them will help you be a successful investor.
Essentially this means that a few mistakes are inevitable; however one has to learn not to repeat it. However, being ignorant cannot be an excuse to make frequent errors – in this case either you need to change or have to learn the right way/process.
If you’re not making mistakes, then you’re not doing anything. I’m positive that a doer makes mistakes. – John Wooden (Tweet this)
Investment Mistakes – Challenges in Learning and Overcoming it
For instance when you rode a bicycle for the first time you did not know how to balance the cycle in the first place. You also did not know how to stop and dismount from the cycle. This is ignorance. But over a few days you started learning you learnt how to maintain balance, use the pedal, apply the brake, etc.
When you first learnt math you were not familiar with all numbers, calculations, formulas, etc and were prone to making mistakes. But once you learnt the basics math became more familiar and easier. What was unknown and complex earlier has now become familiar and simple.
Similarly in case of investments you will know a few facts initially to help you take decisions, and overtime you will get used to the advantages and drawbacks as well as discover how it works. Let’s look at the common investment mistakes that people tend to make.
Common Investment Mistakes
Whether you are familiar with investments or totally alien to it, you need to take some simple steps to understand how it works and take decisions accordingly.
There is no “one-size fit all“ approach so the points mentioned may or may not apply to you, and its importance can vary from one individual to the other.
1. Lack of Goal or Focus
Whether you save some amount for emergencies or invest in a stock you need to have a focus or goal in place. The goal or objective is highly personal and subjective in nature. It could be something like ‘Accumulating Rs.5 lakh for daughter’s marriage’ or ‘Creating Assets worth Rs.10 lakh in 3 years’ or ‘Save for a vacation to Singapore’ or ‘Retire in my early 60’s’, etc. Sometimes you may not have a goal at all.
In case you are uncertain you can have a generic plan like ‘make Rs.2 million in a few years’, ‘make a retirement corpus worth a few crores’, ‘save 10% of my salary for retirement’, etc. These are too vague, but still okay because you atleast have some vision or direction in place and later you can decide on time lines or amounts.
Having no idea or vision or focus is not an excuse – if you are not comfortable revealing or talking about it, keep it as a personal goal or vision to yourself. Having no goal or focus will be a big mistake because without a compass a ship can drift in any direction and lose track of its mission.
2. Ignorance of Features
Most people buy or purchase something without taking time to understand its basic features and functioning. Features include investment amount, tenure (term), expected return, liquidity, etc. One of the main questions people forget to ask “How soon can I get back my original investment (principal)?”
For example, if you are investing in NHAI Section 54 EC bonds you need to stay invested for 3 years and cannot take out the money. Tax savings funds or ELSS also have a 3-year lock in. Some fixed deposits with 5-year lock-in are eligible for tax deductions.
If you are going to blindly jump on to these investments just to save tax, remember that you will not have access to redeem or withdraw your investments for several years. Most salaried people who plan their taxes in the last three months of the financial year (January-March) fall in to these traps and run out of cash when they meet with additional expenses or unforeseen emergencies.
3. Lack of Documentation
It is very critical to maintain all documents relating to your bank, insurance, demat account, etc in an accessible place. Also ensure that all family members are aware of this so that they can access the same in your absence.
There was a case of Mr.Praveen a senior professional with an MNC who passed away due to a heart attack. The surviving wife and kids could not locate the insurance policy and its details. When they found the documents a few months later and made a claim, the insurance company refused to honor it stating the delay in claim.
This situation could have been avoided if proper documentation was followed.
Documentation starts when you are in the process of buying a product – i.e. when you fill the requisite forms. Most people don’t fill the forms properly or rely on the Sales Executive or Representative to do it for them. People either don’t have time or don’t have patience to do it themselves. But the consequence of this can be hazardous in the long run.
For instance you may have forgotten to fill up the Nomination details, you bank a/c information, etc. In some cases you may not have chosen the right mix of features/facilities such as online banking, debit card, cheque book, ECS facility, monthly statement option, type of account, choice of plan/scheme, etc.
Also read: How to Protect Yourself from Financial Scams where a high net worth business client was cheated by the Relationship Manager of a MNC bank.
4. Casual Decision-Making
Trying to guess or follow what your friend or cousin does is a sure recipe for failure. With due respect to the knowledge/experience of you friend/cousin (assuming they are good at it) try to understand the features and why they chose a product. Ask them “Why they chose A/B/C product/plan? What it offers, etc.” Most of us do this when we want to buy a vehicle (a scooter, motorbike, car, etc).
For instance in case of a car you check things like mileage, looks, suitability for inter-city travel, luggage space, RPM, engine quality, etc in addition to other requirements.
Another casual approach is to follow a broker’s advice or what is shown on television or published in news. Ofcourse some media inputs are required but you need to do some homework and take a judicious decision before committing your hard earned money.
Don’t hurry up thinking you will lose the opportunity – because loss of opportunity is far better than losing your capital.
5. Misunderstanding Risk-Return Tradeoff
We started with some examples of ‘mistakes’ and understand that they are not 100% avoidable. This is also true for risks. Risks cannot be avoided or fully eliminated but can definitely be managed. All asset classes have certain risks.
Equities are known to be risky but they also reward well if the company performs well. So if you invest all your savings in equity and expect a consistent 25% return p.a. every year, then you are absolutely wrong.
We all know risk and returns go together High risk = potential for high return and Low risk = potential for lower return
I’ve underlined the word ‘potential’ because we are only talking about future possibilities which may or may not happen as per our expectations.
So this has to be taken with a pinch of salt. If you are new to investing try to be a little moderate or conservative and diversify across low, medium and high risk instruments so that you don’t compromise on both returns as well as risks.
6. Lack of Patience
Some people ask questions like “Can you tell me a few ideas which can give good returns in 3-6 months?” This is more of speculation/trading rather than investment. Unless you are a professionally qualified/experienced trader you should not be doing this.
7. Flexibility to Change or Accept Mistakes
Even the world’s best investors can miss opportunities or even make losses on their portfolio or choice of investments. There is a tendency for some people to stick on to the wrong stocks because of their fondness or attachment to their strategies or ideas.
In such cases, it is better to book loses and move on rather than waiting and seeing your money evaporate. Similarly when you have made very good profit and market is in a bull phase, try to book some profits. Taking some profits home in bull markets is a good practice, which even large investors do – but no one tells you about it.
Remember that “loss of opportunity or additional gain is better than losing your capital”. Its not necessary that you have to be fully invested or fully in cash – being disciplined in investing gradually and consistently in different assets will insulate you from extreme volatility.
8. Following the Crowd
I’m not saying whether this will or will not work. But blindly following some people or the market itself may not give good results. There is no formula or easy approach to investing – its both science as well as art and is subject to varying probabilities and nasty surprises.
Even if you don’t follow the crowd and take a ‘contrarian’ approach – its not going to guarantee success. If there was a sure shot formula to make x% returns in stocks or commodities, then the Gurus would be doing it themselves rather than advising others. So remember that they are also making calculated estimates and guesses, which may not be 100% accurate.
9. Frequently Watching Prices
This is a habit which is difficult to resist (even I have this habit currently). Try not to frequently follow prices every day on TV, newspapers, etc. Sometimes this also tempts you to trade or make small gains and lose the long-term wealth building opportunity. However, to avoid this habit its important that you select the right investments which you believe have lesser downside risk and have the ability to recover back from weak .
Conclusion – Investment Mistakes
We talked about how to learn from mistakes and to avoid being ignorant or negligent.
Martin Luther King Jr’s quote aptly says “Nothing in the world is more dangerous than sincere ignorance and conscientious stupidity.”
A large amount of investment mistakes can be avoided if investors followed a few basic rules. So try to do some reading or research before you commit your investments. This can atleast minimize your investment mistakes and help your investment choices match your expectations to a large extent.
The last but most important thing to remember is to be adaptable and flexible to change your plans to sail through different market conditions and cycles.
If you learn how to avoid these common investment mistakes and take informed decisions, you can possibly build a sizeable wealth worth millions in the long run.