1. Buying High Selling Low
   
   This is the typical investment trap for most investors, big or small and the single biggest reason of losing money. It is so difficult to not follow the trend.
   
   Intuition tells you to follow trends. We get tricked in by our own emotions driven largely by the crowd. We get exuberant when something is doing well and want to buy more of it and we feel sad when something is not doing well. This makes us to buy high and sell low – the opposite of what we should be doing. Result: Losses.
   
   Tip: Buy when markets are low and sell when markets are high. Control your emotions and inculcate investment discipline.



 
2. Not Rebalancing your portfolio
   
   Rebalancing is an automatic way of buying low and selling high without emotions getting in your way. The solution to point 1 above.
   
   But before that, you need to have the asset allocation in place. Determine your risk appetite and build a proportionate allocation of how much money should be invested in equity, debt, real estate, gold and cash.
   
   Once this is carried out then on a periodic basis, you should evaluate if your proportion has altered significantly. If it has, then redistribute the money in a way to reflect the original proportions. This is what rebalancing is all about.
   
   Tip: To rebalance, more money can be invested in one of the asset classes or money can be withdrawn from the asset which has grown higher and put back into what has grown lower.



 
3. Advice from friends, family and relatives
   
   Charles Kindleberger, author of Manias, Panics and Crashes says, “There is nothing so disturbing to one’s well being and judgement than to see a friend get rich.”
   
   And this leads us to take advice from these friends/ family/ relatives. Of course, there is an implicit trust with these members which we depend upon. But then you have to realize what is good them may not be good for you. And by the time you try to make the investment in the tip, it may be time to exit it (buying high again).
   
   Tip: Friends/Family/Relatives cannot provide you dedicated time to understand your needs or help you in ongoing way. You have different goals and risk taking abilities. And what you invest in should reflect your needs.



 
4. Investing in Alternatives
   
   If you hold a premier account with any bank then structured products, private equity, hedge funds, art, et all are items that have definitely come to you one or the other time. Unfortunately, while these instruments can add to the diversity, they may not necessary lead to diversification.
   
   The most certain thing with these alternatives is that they have a high cost structure and they assume excessive risk. And though they have a chance of delivering extraordinary return, there is an equal chance of going bust.
   
   Do not believe published data. First there is not much available and that what is available is not entirely accurate.
   
   Tip: Just stay clear of these costly and troublesome alternatives.



 
5. Not Hiring an Investment Advisor or Planner
   
   Mind you, we are talking about an investment advisor and not a broker, distributor who sell you products like equity, insurance, mutual funds. Before you buy a product, you need to have a financial plan in place along with an asset allocation that will determine what should you buy and how much. This what a independent investment advisor will do for you.
   
   An independent investment advisor or planner brings discipline and clarity to the investment process and helps you avoid all the behavioral traps listed above that can impede your ability to realize your financial goals.
   
   An independent investment advisor or planner will charge you fees. Do not shy from that as this helps him to maintain the unbiasedness required to build the right plan for you.
   
   Tip: Call an Independent Investment Consultant/Planner now!

 

You can also speak to an Investment Consultant from PersonalFN today and find out how we can help you make the right investment decisions. Click here to contact us.

 

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Comments
harriesoni11@gmail.com Feb 22, 2011 You are Right;But you are not thinking About Small Investor. His major part of Growing amount, you demanding for prepare a plan. Will u think abt small investor? Pls. make provision charges should be taken per year & after profit(grow investment) Regards; Haresh Soni Ahmedabad Mob: 9879561470
mnnair1968@gmail.com Feb 24, 2011 What is the minimum amount for creating a portfolio with persoanl fin
subash.yadav@gmail.com Feb 25, 2011 Very valid points highlighted in this article. But people are smart enough to sniff motive behind item 5. But why don't you take investor/clients into confidence by laying out payment plan on returns/profits they will get with your advice and financial plan. That is what anyone wants.. a contract on faith... Something like: "We will charge you if suggestions provided by our executive gives you minimum of 20% of returns on your investments". Package 1: Get 12% return, duration 1 yr, charges say 2% of profits on target achieved and pay back 2% of losses incurred if it do not achieve 12%. Package 2: Get 15% return, duration 2yr, charges say 3% of profits on target achieved and payback 3% of losses incurred if it do not achieve 15%. Package x: Get 20% return, duration 5yrs, charges say 5% of profits... .... This will surely give you boost in your sales and stay you accountable of any non-achieving goals of your client. If this strategy works to increase your sale when you follow this strategy then you will pay me(idea giver) a 10% of profit from sales increased with this idea. I can give you more such ideas of insurance/assurance. :) Subash

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