Many investors take investment decisions without any long-term financial plan in mind.
A long-term plan is based on life goals, assets, liabilities, income and expenses.
Example: goal to accumulate Rs 15 crores by retirement (age 63), goal to accumulate Rs 15 lacs for child’s higher education by 2025
2.Short time frame.
Many investors take investment decisions with a time horizon of few weeks or months.
Investments, particularly if you are buying equity stocks or equity funds need to be made with at least 5 years in mind. The longer the time frame, lesser will be volatility of returns, higher will be the predictability of returns. Hence, taking investment decisions with a long-term goal in mind is always recommended.
3.Taking financial media seriously.
Many investors actively read and immediately form views, based on reading financial dailies or by watching financial news over TV and Internet.
No financial news, reports can help you achieve your long-term goals. Turn them off. Solution? Spend less time watching financial shows on TV and reading financial dailies. Spend more time creating and sticking to your long-term investment plan.
4.Investing without understanding the risk profile.
Every investor has a unique capacity to take risk. A risk profiling exercise is a must-do before starting to invest. Investing without a risk profiling exercise is like firing bullets in the dark.
5.Investing without an asset allocation plan.
An asset allocation plan defines the allocation of money between assets and is a base for wealth creation. No wealth creation is possible without a scientific asset allocation plan. As per studies conducted in U.S., the long-term probability of success of a portfolio is 94% if the investor sticks to the asset allocation plan made.
6.Investing without periodical portfolio rebalancing.
Rebalancing is the process of returning your portfolio to its target asset allocation as outlined in your investment plan. Rebalancing forces you to sell the asset class that is performing well and buy more of your worst performing asset classes, this is a sure fire method to reap gains.
A portfolio which is not rebalanced with the market guarantees that asset classes will be overweighed at market peaks and under weighted at market lows -a formula for poor performance. The solution? Rebalance periodically and reap long-term rewards
7.Overconfidence in past history
This is a typical human weakness, extended to the domain of “Investing”. Like anything else in life, demonstrating overconfidence, just on the basis of past historical data or events is a sure fire method to fail.
Example: if someone has observed that certain stocks had risen in the last 3 years, just the day after the union budget was presented, does that mean, that this year too, the same stocks are bound to rise the next day after the budget?
Stocks can only rise if there is some positive news around it and not due to any other factor.
8.Chasing top performers
Many investors select asset classes, strategies, equity stocks, fund managers and funds based on recent strong recent performance. The feeling that “I’m missing out on great returns” has probably led to more bad investment decisions than any other single factor.
If a particular asset class, strategy, stock or fund has done extremely well for three or four years, we know one thing with certainty: We should have invested three or four years ago.
Now, however, the particular cycle that led to this great performance may be nearing its end. The smart money is moving out, and the dumb money is pouring in.
Chasing top performers always is risky as today’s top performer may not be the same tomorrow (be it a stock or mutual fund or asset class)
It is always wiser and better to stick with your long-term investment plan and rebalance your portfolio periodically, which is the opposite of mindlessly chasing Top performers
9.Copying others, looking for quick tips.
This is the most universally practiced habit of investors.Every investor is different with different goals, investment styles and investment needs. Copying somebody is a dumb thing to do in investments as what’s good for that person need not necessarily be good for you. It may in fact be unsuitable for you.
Example: If your friend regularly seems to trade in aggressive stocks and seems to be making money, do you think doing the same thing would be suitable for you? Are you prepared to take loses which can occur with this strategy?
10.Only Plans…NO ACTION!
Many investors are diligent and good at doing long-term planning, but they hesitate to execute the plan.
At the end of the day, it is ACTION which counts as the journey to wealth creation starts by acting upon a long-term investment plan, which has all the key success elements of risk profiling, asset allocation, portfolio tracking and rebalancing apart from capturing cash flows like assets, liabilities, income and expenses and defining long-term goals and the plan to achieve each goal.
Investors who recognize and avoid these ten common mistakes give themselves a great advantage in meeting their investment goals.
Most of the solutions above are not exciting, and they don’t make great cocktail party conversations. However, they are hugely profitable and create long-term wealth.
And isn’t that’s why we really invest?
So, what are you waiting for?
We at www.investmentz.com provide financial planning services to our customers. Please call us right NOW to make your financial plan
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.