Major Mistakes Investors Make in their Life
When it comes to investing, investors make a lot of mistakes and that is not bad. Afterall it requires a lot of failures and mistakes to become a successful investor. Patience & Discipline is what the investors need to have to grow their wealth over a long term.
Do you feel you have been missing out on something in investing? You don't see your money growing even after years of investing?
We have listed down some major mistakes investors make in their journey to be a successful investor. These are:
- Missing out on Research: When we can spend our valuable time in doing research while buying mobile phones, cars or any other thing, then why do we miss out on research before making our investment decisions?
It has been seen that most investors invest their money in over-hyped stocks and funds or in ones as per random advice. Most investors do not conduct enough research & analysis prior to making these investments.
It is very important to research the market, industry, peer’s performances, growth potential before putting your money in any stock or fund. There is a long list of mutual funds, stocks and investment instruments that are available in markets, but you just have to choose the right ones that have the potential to grow your money. And you can choose the right ones only when you have done enough research work.
2. Investing not as per risk appetite: “Higher the Returns, Higher is the Risk”.
Investors randomly jump into funds getting lured by their high returns and miss out on exploring the risks involved in investments. This proves to be a really dangerous consequence for some investors(with short investment horizons, low risk appetite or having emergency requirements) who can’t see their portfolio losing high values during market fluctuations.
Firstly investors need to understand their risk profile and how much they can afford to lose. After identifying what their risk profile is, investments of suitable risk characteristics should be chosen.
3. Emergency funds: Investors fail to keep an emergency buffer for the times of uncertainties.
Ideally investors should have an emergency buffer of 3-6 months of their expenses in their savings account or other highly liquid sources. Liquidating or selling of investments for emergency needs at times when the market is down, you may have to suffer huge losses. So it is very important to have an emergency fund which will help you to meet emergency needs or urgent requirements of money and hence, not using your portfolio for that.
4. Not having health policies: An unforeseen health emergency can cause a financial drain, you may have to use all your savings in paying medical bills. Costs of medical treatments have been rising in India and buying a health insurance policy can help to save your money in these events by providing a cover for that.
Read More: How to become a Mutual Fund Advisor
It’s very important for every investor to purchase an insurance policy for himself as well for his family.
5. Failing to Diversify: Investors make the mistake of not diversifying their investments and thereby having a highly concentrated portfolio in a single asset class. As the most successful investor Warren Buffet says “ Don’t put all your eggs in a single basket”, one should not put all his money into one investment.
Investors should try to allocate their money in different asset classes & across categories. For example, one investor wants to invest in mutual funds then he can diversify his investments by creating a portfolio of funds such as equity funds (with sub categorization into various categories), debt funds, hybrid, international funds and also gold and REITs. The investor can choose a mix of different funds as per his risk profile, investment horizon.
6. Diversifying too much: Then there are some investors who for getting the benefits of diversification, diversify into lots of funds.
The main problem with having too many funds, stocks & investment instruments in the portfolio is that it becomes difficult to track & monitor the performances of funds. An investor needs to track the performances of his funds from time to time so as to make necessary changes by selling off, or buying new funds which can keep them on track to achieving their financial goals.
So investors should diversify only to the extent they can handle or track them rightly.
7. Using Borrowed Money: Another common mistake investors make is of using borrowed money to buy investments. Leverage in your portfolio can surely increase the returns, however the same is applicable in case of losses - they get increased.
Borrowed money poses high risks in the portfolio of losing more money. For example, an investor who invests 50,000 from his own & borrows another 50,000 to make an investment of 1,00,000. If there is a 20% rise in his portfolio then he can get returns of 20,000 (i.e 40% on his invested capital of 50,000), getting the benefit of borrowed money.
However, on the other hand he will lose big the same way, a 20% fall in portfolio value would mean he will be left with only 30,000 with 40% loss. This is a lot more than what he would have lost without borrowing the funds. After losing this big, he will also need to pay for the agreed interest rate on borrowed money.
So investors should keep in mind the consequences of using borrowed money for investing and their capacity.
8. Lack of Patience: Who doesn’t want to get rich fast? But it takes real patience to be successful in investing. Impatient investors lose their money to the people who remain patient.
Investors after seeing the underperformance of their portfolio sell off their investments in huge losses. Rather what they should do is try to find out the reasons behind the downfalls in their investments and see if they have the potential to grow. They should take decisions for exiting their investments very carefully only after analyzing about the current condition of the asset.
It takes a long time to build real wealth, you just need to believe in your investment decisions and wait patiently for them to show the returns. Through these points you can identify & try to avoid the mistakes you are making.