How you can avoid making cliché investing mistakes

When investing, you need to be aware of what is right for you. Ensure that your focus is on asset allocation that will work best for you.

Updated: Feb 2, 2021 05:31:43 PM UTC
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Absence of review and monitoring The world is changing at a rapid pace every day. The old concept of investing may not work today, where you put money in some product and forget about it for years. Your portfolio needs to be monitored and reviewed every six months or one year. You don't need to make any changes unless there is a change in your financial goals or a major change in the attributes of the schemes you are invested in. For example, if you decided to retire at 60, and later changed that target to 50, then you may need to make major revisions to your portfolio. Keep rebalancing your portfolio on the basis of your financial plan and changing circumstances.

Following the herd mentality
Whenever there are ups and downs in the market, many investors tend to implement changes in their portfolio. There is an information overload. You may get a lot of advice from friends, relatives, social media, and the news—that is often conflicting. This overload can also create a fear of missing out. In India, everyone is a cricket coach, political pundit, or investment guru. However, it is important to consider the impact of the changes in the market on your long-term financial goals and only then consider changes in your portfolio. Always keep your risk profile and financial goals in mind.

Thinking that you can buy low and sell high, always
Trying to buy low and sell high is essentially timing the market. It is practically not possible to buy low and sell high all the time. Do not panic or be excessively adventurous while buying. Stick to your investments according to your goals and not the ever-changing market. Focus on your goals and maintain consistency and discipline in your investments. Avoid the noise and the associated feelings of greed or panic.

Booking profit or losses, catch-22
It is always difficult to decide when to book a profit and when to cut your losses. However, losses tend to stick in our minds more than profit. Let us consider a scenario where you invested Rs 100 in one scheme and sold it at Rs 120. At the same time, you invested Rs 100 in another scheme and made a loss of Rs 10. Your mind is going to be stuck on that loss, and your confidence in the scheme where you are actually making a profit may take a hit. You may even sell that. On the other hand, you might want to recover from the loss in the other scheme and so you will stay invested there.

You only leave a job when you lose motivation for your old job, find a better opportunity elsewhere, or want to retire. A similar logic applies to mutual fund or stock market investing. You can move your money elsewhere or spend it if you have achieved the objective you wished for. However, do not just look at short-term profit booking. If you are always looking to sell and book a profit, you will have sleepless nights because nobody can control this. Similarly, also keep in mind that if you book a profit, you still need to invest the money somewhere, unless you need to spend it immediately. Focus on your asset allocation and investment objective, and decide when to buy or sell depending upon that.

Missing out on the power of compounding
Setting ambitious financial goals is good and can yield great returns over a long time. However, many investors tend to get disheartened when they realise that they may not be able to invest an amount that they need to achieve a particular goal. Compounding is rightly called the eighth wonder of the world. It is a way to make your money work for you. If you invest Rs 5,000 monthly over a period of three years assuming 12 percent returns, your capital will be Rs 2,17,124. If you invest for 10 years, this amount will be Rs 11,53,565, and after 30 years, it will be Rs 1,71,91,496. Over a period of time, compounding will multiply your returns, provided you maintain discipline in your investments.

Over diversification
We know that we should not put all our eggs in one basket. However, this also does not mean that we should invest in every possible scheme. The right asset allocation is like a thali at a restaurant. Pick out everything in moderation for a great meal. Restrict your portfolio to no more than six-seven schemes on the basis of your asset allocation and risk profile.

Not investing a sufficient amount
Many investors have not explored equity enough as an asset class. Hence, they are naturally averse to it. Their capacity to invest in equity could be up to Rs 1 lakh, but they might invest only Rs 10,000 or Rs 20,000. It might seem a lot because you have never invested in equity, but you need to look at it from the perspective of your overall asset allocation. Using the step-up SIP method can be a good way to gradually increase your investments.

If you can work with all these factors in combination, you can be sure of achieving success in your investments. Everything is right, provided you do it with full awareness. You need to be aware of what is right for you. Focus on your asset allocation. If you are young, you may be able to take more risk and invest in equity and mutual funds, but you also need to ensure that you invest in other asset classes based on the right asset allocation for you.

The writer is a chartered accountant and founder and chief gardener of Money Plant Consultancy

The thoughts and opinions shared here are of the author.

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