Investors have repeated mistakes since the inception of the modern markets. Being an investor, you can boost your chances of better success and higher returns by avoiding common errors with caution.
Here are five common financial mistakes investors make:
Ideal Balancing : You do not have to lose your sleep over investing. All you need to do is put great thought into every decision and be mindful of certain factors. One important factor is balancing investments to reduce risk. Usually, investors are either too risk averse (preferring fixed-income instruments like Fixed Deposits and Debt Funds) or too risk-friendly (investing all their money in stocks, especially for short-term trading). Ideally, investors should diversify their portfolio. However, more often than not, the idea of diversification hits investors quite late. Aside from acknowledging good asset allocation, it is also important to recognise the percentage of diversification and the need to diversify within each asset class. If you are investing in stocks, you need to create further balance between large-, mid- and small-cap stocks.
Understanding Risk : Most investors assess risk before investing, but what many fail to do is review this risk keeping in mind your own needs and requirements. The risk has to be relevant to you. For example, if you are 30 and are saving for your retirement, market volatility is a smaller risk than inflation, which has a direct bearing on your long-term investment portfolio. So ensure you get an independent and customised risk profile before you choose assets.
Timing The Market : The best time to start investing for the long term was yesterday. There’s no point in waiting, while gauging what the stock market’s performance will be like next year. When it comes to long-term savings, it is best to invest it as soon as you can. No one can really time the markets. Time, and not returns, is the best way to ensure your money grows. That said, it is important to also note that markets often have tops and bottoms. There’s a good chance you could end up minimising your profits if you invest all your money in a single transaction. This is why it is important to invest on a weekly or monthly basis, instead. This can offset the probability of losses, without requiring you to time the market. If you buy at a high point in one month, it could offset later when you buy during a market dip.
Following The Yield : Investors are usually on a constant lookout for investments that give higher returns than their current investments. A simple example is investors flocking to buy a company’s stock that announced a large dividend. However, it is important to stop and understand if this high return is valid and more importantly, consistently achievable in the long-run. High returns could be a trap. For example, if a company is using all its cash to pay quarterly dividends, it could mean it does not have good growth-increasing opportunities. Plus, this high dividend may not be possible in the years to come without depleting cash reserves.
Misleading Performance : Historical performance is only an indicator of past performance. It’s not a guarantee of future returns. Plus, numbers can easily be portrayed in such a way that the investment product’s performance looks better than it really is. This is why it is important to not invest solely on the basis of the past performance. Look at various return metrics to measure performance – consistent returns, comparing with different asset classes, returns when the market was down, after-tax returns, cost-to-return ratios, etc. Customizing an investment portfolio must not bear reference to past portfolios, but should showcase the current portfolio’s chances of success.