5 common investment mistakes
Apr 28, 2005

Information overload is not uncommon in today’s hi-tech world. Information is available at your fingertips and that too you are able to access it wherever you go. You seldom use your PC (personal computer) to access information as your mobile phones are now equipped to access the internet. With such a vast database of information on the internet, it must be, many a times confusing for you to get the right information on where and how you should be investing your hard earned money in order to generate long term wealth.

Well, there is no doubt that there are numerous distributors, agents and relationship managers educating you on where you should invest your hard earned money. But unfortunately, many a times it is their vested interests which results in investing your hard earned money in an investment avenue which is not suitable for you in terms of your risk profile. These days you need to act responsibly and not get swayed by the tall claims made by the distributors / agents / relationship managers. Moreover, you need to be aware of these below mentioned common investment mistakes and avoid it too.

1. Not setting an investment objective: A large number of investors are habituated to carry out their investment activity in a haphazard and sporadic manner. Very often they fail to set an investment objective which is a basic tenet of financial planning. Investors should adopt a more systematic approach to investing by creating distinct portfolios for all their needs i.e. short-term (planning for a vacation), medium-term (buying a car) and long-term (planning for retirement) needs respectively. Setting of investment objectives also incorporates a degree of discipline which is a vital ingredient for the success of any the investment activity.

2. Not doing your homework: Investing like any other serious activity needs a fair degree of preparation at the investors end. Investors need to gather information and acquaint themselves with all the options available to them. Investing in a given asset class (for example fixed deposits) simply because you have been doing so in the past is inappropriate. Investors have a plethora of options ranging from mutual funds, fixed deposits, and bonds to small savings schemes to choose from. After getting the facts in place, investors should select instruments that are best equipped to fulfil their investment objectives.

3. Succumbing to the noise: Every time the equity markets hit a purple patch, investors come face-to-face with a lot of noise. Fund houses go on an IPO (Initial Public Offering) launch spree and distributors do their bit by convincing investors that the recently launched scheme is the place to be. For example recent times have seen a surge in interest in funds of the flexi cap and mid cap variety. Investors tend to succumb to the noise and get invested simply because everyone else is doing so. The trouble is that investors may well discard their pre-determined asset allocation based on their risk appetite and make investments contrary to their risk appetite.

Investors must exercise a lot of discretion and resist falling prey to the herd mentality, especially at a time when everyone around them is busy painting a rosy picture of the investment scenario.

4. Getting attached to investments: Investors must remember at all times that investments are a means to achieve ends (financial goals) and not goals by themselves. If investments have failed to perform their requisite task, then investors should be flexible enough to act on the same. Investors should never get attached to their investments and stubbornly cling on to them. Assess at regular intervals how well your investments have performed and initiate the necessary corrective measures.

5. Timing the markets: A large number of investors like to believe that they can time the markets; nothing could be farther from the truth. If this notion was correct, we would have experienced a surfeit of fund managers and investment gurus. Instead of trying to outsmart the markets and failing in the process, adopt a more scientific approach. Use the SIP (Systematic Investment Plan) route and invest regularly to benefit from the markets. Don’t try to beat the markets, join them instead!

So the next time you plan to invest your hard earned money in an investment avenue make sure you do not commit any of the above mentioned investment mistakes. Instead have a planned approach towards your investment and take professional help in building a portfolio to achieve your goals and generate wealth.