The investment world is a very tempting place, where many build their fortunes and many lose it. It’s a place where committing investing mistakes are common, but learning from them is also important. And, this factor is what separates the successful and intelligent investors from the ones who constantly lose their money.
Incidentally, all the investing mistakes usually committed can easily be avoided through awareness, alertness and training. Here, in this article, we will look into the common investing mistakes, and help you understand, how to avoid it.
1. Having No Investment Goal
Investing without having any clear investment goal, is what can be referred to as one of the biggest investing mistakes.
Every good investor has an investment objective before making any new investment. It helps them to continue the investment with a plan and make necessary adjustments midway to reach that goal.
Goalless investing is very dangerous because the risk to deviate from the plan is higher. And, if you liquidate your investments, it gets spent in unnecessary and not so meaningful purposes.
2. Failing to Identify Right Risk Tolerance Level
Every investor has a risk tolerance level or how much money they can afford to lose in the averse market situations. Continuing to invest against the right risk tolerance levels will always give you below-par results.
For example, if your risk tolerance level is on the lower side, and you invest in a large-cap or mid-cap funds (which are high-risk grade investment product), then your return percentage will not fall in expected line. You may have to incur losses in the first few years.
Likewise, if your risk tolerance is high, and you invest in secured mutual funds like balanced funds or debt funds, then you will not achieve a higher rate of return that you are expecting from your investments.
3. Selecting Wrong Asset Class or Fund Type
Picking the wrong mutual fund is another common investing mistake, we usually see investors commit. Due to lack of proper financial knowledge & training (financial literacy), people tend to depend on the investment advisers for all their investment needs.
If the investors don’t communicate well with the adviser about his/her requirements from the investment, risk of selecting the wrong asset class or fund type is high.
Investors need to know their requirement inside out and if doing through an advisory, then he/she should properly communicate. Without this, your investments will not deliver the desired results.
4. Stopping Investments Midway
Stopping investments midway is the most common phenomenon seen during the market crash or when trading at the highest levels. Investors choose to book their profits amid rising valuations or cash out from the market during fall, fearing further erosion of investment value.
Stopping SIP investments midway fully jeopardise your investment goal, and you stand to lose the benefits of compounding. Timing your investments is a very wrong strategy in the long term investment journey, as you end up investing far less amount and miss reaching the investment goal.
You should take advantage of all the market cycles (bullish or bearish) to churn out higher returns from your investments in the long term.
5. Not Performing Due Diligence
Most investors, specifically the new ones don’t do the required research on the fund, before buying it, and depends on the wisdom of few financial advisors and friends. You should know, not every fund is designed for every investor, and you should check whether it is fulfilling your requirements or not.
Performing due diligence of a fund might disclose some ongoing issues or exposure to a particular sector, which you think might not perform well in future and can drag the overall fund’s performance.
If you don’t know, how to perform due diligence or review a fund, click the link below:
6. Not Reviewing Regularly
Just as performing due diligence before investing is important, in the same way reviewing the fund’s performance after investing is also necessary.
Regular review of funds ensures you stay in the right investment path and spot any deviations. And if there is any deviation in performance, you can take the necessary steps to limit that.
7. Failing to Diversify
You must have heard this proverb, don’t put all your eggs in one basket by investing all your money in a single asset class.
Diversification is the key to all successful investment journey, and without it, you run the risk of losing too much, in averse condition. Spreading all your investments across different asset class helps you to reduce the overall portfolio risk and balance the return.
8. Over-Ride of Emotions
Emotions in the investment decision making is very dangerous as it can over-ride many important factors like rational-reasoning, logics and common-sense. It results in irrational, illogical choices which altogether harms your investments.
While investing you have to exercise patience, as every good strategy takes its own time to start playing out.
Investing Mistakes are very common, but what will separate you from the rest of the crowd is, learning from the mistakes and trying to never commit the same as it costs money. However, still, the majority of investors will continually fall back to the same mistakes which we have discussed due to fear & greed.
But, with experience and all the learnings from the past mistakes, will make you a better investor and help you to quickly identify the potentials in the market.