Common Investment Mistakes to Avoid - 1
There are few common mistakes which every one of us might make in regard to investment. If not avoided, they led to either wealth-erosion or suboptimal returns.
As amateur investors, we tend to make a few common mistakes. These mistakes might lead to either wealth erosion or suboptimal returns. To avoid this, we are going to make ourselves aware of these common mistakes.
No Clear Investment Objective/Plan:
We have discussed this in the previous edition of the Minutia. But let’s make it clear why this can cause a problem in the wealth creation journey.
If we are throwing darts in the air with closed eyes, then we cannot be certain of hitting the target precisely.
The same applies to anything about the life. If you are not sure of what you want, then you only end up trying out things which entice you from time to time.
In investment, many make the mistake of choosing the wrong product just because the product is a hot trend at the time. Even if the product might not fulfill any goal.
This makes your investment journey a pure gamble.
But, when you have a definite goal, it gets easier to make the right choice. Enables us more, to go towards the goal post, one step at a time, with certainty.
If this is not followed, then like many investors, we might end up with products which we don’t need. Like wrong Real Estate product or wrong mutual funds which might not give us good returns, let alone fulfill our financial goals.
It is wise to stop gambling with our money and know thoroughly for ourselves on why we are investing and what we are investing in.
To conclude on this, give your investment a purpose or a definite goal, namely, to sustain the financial status through retirement or fund recreational trips, children marriage, education, house, car, capital for side-business.
Trading too much, too often:
As mentioned earlier, invest requires time to reward.
Just like you would buy Gold or Real Estate and wait for a long period of time to have its value appreciate. Equity too requires a time of at least 3 years to reward well.
But if you are investing for a 1 year or less in a company or mutual fund and then move your investment from that company to another company (in the want of returns) then you are just trading your money for booking profits or make more profit.
You are not giving enough time for the investment to do its job and hence, you don’t reap the benefits of it.
Another down-side of trading too frequently would also lead to higher transactional costs. By this, your brokers are making more money but not you.
To create wealth, restrain from trading too much and too often. Choose the long-term investment route and gains substantial returns.
Trading does not let the power of compounding do its job. Long-term investment leverages on the compounding power.
Be wise and choose long-term investment for wealth creation, and trade only to book short terms gains.
Lack of diversification or Over-diversification:
Every investment has a risk associated with it. By not knowing this, many have their portfolio concentrated in only one or two types of investments. Or they over-diversify their portfolio by investing in too many investments, in the hope to avoid risk all together.
It is never further from the truth for money that never keep all your eggs in one basket. But don’t have too many baskets, so that you lose track of those.
As a thumb rule, Never invest in more than 15 different stocks or financial products. And also don’t restrict your portfolio to less than 6 stocks or financial assets only.
Understanding your investment goal and investment products will come handy in deciding the diversification part.
To conclude, Diversification is only to lower the risk associated with different investments. Care should be taken to avoid excessive diversification or lack of diversification for any negative impact on the portfolio returns.
Have a good balance of financial products to handle each financial goal. Debt products for short terms goals and equity for long terms goals. Gold and Real Estate for money-value preservation.
High commissions, expenses and fees:
Commission, expenses and fees to brokerages will compound too with your returns to the long-term.
These will eat away your returns more than any other thing in your investment.
Many brokerages, advisory company make more money only thorough high commissions, expense and fees. Hence, they recommend and nudge us to buy high-cost fund or high-cost advisory services.
Check for hidden fees, annual fees levied by mutual funds on your investments before you select a mutual fund.
Since we can’t avoid these expenses, always choose a fund which has reasonable expense ratios.
As mentioned earlier in the mutual fund article of the Minutia, avoid mutual funds which have entry fee and expense ratio to be more than 1-1.5% of your investment amount. Also, make sure the exit ratio is not more than 1% and the exit ratio is only restricted to the first three years of the investment period.
Above all, if you feel like you can directly invest in equity/company with your analysis, then avoiding mutual fund is a good option.
We will go into the details of how we can analysis a company or stock for investment worthiness in the future editions of the Minutia. Stay tuned for that!
We have four more mistakes to be covered. For that, we have to wait till the next week’s edition of the Minutia newsletter. So make sure to subscribe now if you haven’t already.
Until next time.
Peace out!