Common Investment Mistakes to Avoid - 2
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.
Continuing our discussion on the common investment mistakes we can avoid when investing in stocks or mutual funds. Let’s look at the final 3 mistakes we can avoid.
If you haven’t read the first part of this discussion, you can follow the below link to read it.
Chasing short-term returns:
Money is where the enthusiasm is. Enthusiasm attracts more enthusiasm, which in turn brings in more money.
Putting this in the context of investment. Most people tend to invest in the most enthusiastic products like Real Estate, CryptoCurrency, Fancy Stocks and other products in the hope to make a quick profit.
A lot of us give into this and buy assets because people around us are enthusiastic about those.
But resist that urge and build your own conviction on a product.
Because, In the chase of making quick profit or money, we lose out the opportunity to make stupendous amount of wealth.
Most investors run after higher returns on their investments without the knowledge of the risk involved.
A hope of quick money blinds the human mind. Since we can’t be certain about anything in life (except for death, taxes and expenses), we can’t be of the assurance that an investment will give us high returns based on its past and present performance.
It is important to focus on the bigger picture and not disregard the risk associated with our investments.
We don’t want to win for a moment, we should want to win every day. So we don’t mind compromising on the profits made in the short term, if it helps to create an enormous amount of wealth in the long term.
Timing the market:
Owing to the uncertainty, Markets are volatile inherently. One can’t predict the movement of market accurately. Whilst there are various kinds of indicators that reflect the market trend at a given point of time, this does not mean that one can time the market accurately and then determine exactly when to enter the market and when to exit it.
As the famous saying about market says, One cannot catch the top and bottom of the market.
Basically, you can never tell when the market will fall and how much it will fall at a given point of time, and also when the market will rise and how long it will continue to rise.
So resolving to entering or exiting the market when it is at the bottom or at the top, does not sound like a wise idea.
We can avoid timing the market by either choosing SIP or waiting for the market to give us the stock at the price we ask for.
SIP is a wonderful instrument to average out the price we pay for a stock by buying the stock every month at the available price. SIP should be the default instrument for investing in mutual fund.
For stocks, waiting for the market to give you the price you are asking for a stock would be a good strategy, in spite you have to wait for a long time.
Someone also would buy the stocks when it dips, but we don’t want to pay a premium price. Buy cheap and sell high should be the way. We are going to discuss on this more in the future editions.
Ignoring inflation and taxes:
The price we pay for growth is inflation. No matter, you complain about it or try to disregard it, you can’t deny it.
Inflation eats away the wealth. FDs and Gold returns would be eaten away by inflation.
The 20 Lakhs car which are you planning to buy at the end of 3 years would cost more than 20 Lakhs. Your financial planning takes inflation into account when setting the financial goals.
This is to make sure that we don’t fall short in meeting our financial goals.
You need to make sure that it is not eating up your profits. Inflation grows at a pace of 4-6% during a normal economic times for a developing economy. So the actual returns would be returns by an investment minus the inflation.
When we say we want 15% returns per annum, then we should also account the inflation too.
Taxes are unavoidable. Since taxes would impact our financial goals too, we need to take into account when planning the financials/investments.
We can minimize the impact of taxes by earning more profits and also by investing in the products which give us tax benefits like ELSS mutual funds, Provident funds, insurances and others. Future editions of the Minutia newsletter would address extensively on taxes and how to impact the wealth creation and wealth preservation.
Being aware of these common mistakes of investments would enable us to plan well for financial goals. It would give us a clear idea about what percentage of returns we should aim for and what to expect from investments.
Until next time.
Peace out!