Your income meets your needs and looks after your present,
and your savings and investments create wealth for you and
takes care of your future.
Welcome to the investment world!
It's great that you are thinking about your future and are ready to take the first step on to the ladder. When we invest, what we see is gains coming through and how our investment will be quadrupled within a short span of time. What we often overlook is the darker side of the mirror. Whenever you try your hands on something new, mistakes are bound to happen and it's okay, since we learn from our mistakes. But when it comes to investments, mistakes are counted in financial terms. And it is always good to avoid the mistakes and save our money. It is better not to get very high hopes of making quick money and you should be aware of few things. Following are the common money mistakes which not only a newcomer but any investor can commit:
Money making is the only goal: This is the primary mistake of an investor. He believes that he is investing and he will profit from it soon. If someone asks him, what's the purpose behind him investing? What future goal will he be able to meet with the investment? He most likely will not have an answer. And when need arises, he would either not
have the money, since it's illiquid or it is not sufficient to fulfill the need. The solution to this is make it a point that you will plan before you perform. Plan and allocate your investment into different goal paths.
TV: We believe that the TV journalist or the author of a magazine article on investments is the God of investments, whatever he says is set in stone. What we do not realize is, if he actually knew what's going to happen next and where to invest, he would have been the next Bill Gates. He would not have been
giving free advice. The solution is switch to a movie channel and relax.
Emotions: Emotions play a very important role in our investment practice. You would somehow have a very strong conviction in a particular stock. You would fall in love with that stock because you have read so much about it, you like the brand, or at times the investment manager is from your hometown and you know he is very knowledgeable. However, these investments are not a good deal and not performing. But because of your emotional connect, you believe that a day will come when they will perform and you will gain and the day might never come. So, keep your emotions separate from your investments, the latter should
not be influenced by the former, rather should be based on thorough research and performance records.
No time horizon: Not having a time horizon in mind, or having a time frame too short to meet a goal, is a problem. You have to give appropriate time to an investment to get the best out of it. It is better to invest according to the time period left to accomplish a goal
Speculation: Some investors are often tempted by speculation. Easy and quick money appeals and in order to make money quickly, they become speculators and not investors. They engage in risky transactions like hedging, take short and long positions and attempt to profit from fluctuations in the market, than by capital gains, interests and dividends. They deal in huge amounts, and they can't afford to purchase these stocks. The result is if the price of the purchase transaction is higher than the sale transaction, they are bound to book losses. Most new investors are wiped out because of such speculative activities. So, we should always keep in mind that we are investors and not punters.
Trying to average out: An experienced investor is easily able to get rid of a wrong product that has entered his portfolio, he would book a loss and concentrate on the rest. On the contrary, an unseasoned one would try to average out the purchase price by buying more of the loss making product at a lower price now. This strategy has offered historic trading losses especially in the short term. Investors need to accept the fact that a wrong stock has entered and it has to be removed to protect the health of his portfolio. It is better to go by the advice of a financial advisor, and rely on the mutual fund managers because they are experienced enough to handle such things.
Lose focus easily: We tend to purchase and sell at very short intervals based on others' recommendations. One friend who is an active trader suggested, stock A is the best, so we will also invest in A, another friend who is a researcher suggested stock B will outperform all others, so we will sell A and buy B. Lack of conviction in a particular product would lead you nowhere, you would not be able to ripe the benefits of either.
Market timing: Even the big shots have not been able to time the market, nobody can predict what will happen next. Some investors on the basis of their research try to time the market and it does nothing but damage Investors should rely on professionals, they shall resort to mutual funds, concentrate on their goals and should not panic due to a here and there in the market conditions.
Ignoring the cost: Every investment has a cost associated with it. You have to pay commissions in stock trading, real estate investment exit loads for mutual funds. Investors generally analyse their profits on gross basis and compare products likewise. However, commissions form a part of the cost and at times can bring down the profits significantly. So, you should consider the impact of costs while evaluating a particular investment.
Lack of diversification: Some investors do not have a proper financial plan or even if they have, they often go off track. They tend to purchase a particular product or invest in a particular segment only. This inclination results in lack of a diversified portfolio and if that particular segment or stock fares poorly, his entire portfolio fails, because there is nothing else which can cover up.
Procrastination: Procrastination is the mother of failure. The markets move very fast and we take time in researching and by the time we go ahead with implementing our research, the markets have moved to a different level, however our strategy is the same. And thus we lose out because of improper time management. All these mistakes are mainly due to lack of planning and knowledge. The investor should resort to the services of a financial advisor, devise a proper financial plan and invest accordingly. He should go for professionally managed mutual funds than burning his hands by experimenting on his own.