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  • Writer's pictureSahastha

Common Investing Mistakes

Updated: Oct 4, 2023

Investments are associated with certain risks, in other words, how much risk you are taking in investing decide your returns from them. However, the profit or loss from investments is not always dependent on investment risk. Most of the time investors make losses because of some common investing mistakes. But do you know, these mistakes can be avoided?

Investing without adequate research

If you don’t understand the investment process, don’t invest. Seek expert advice if required. Though it is important to take investment decisions promptly to avoid losses, this does not mean you should take decisions without having full information. You must ensure you have answers to all your questions. Only take investment decisions when you have all answers.

Investment returns are visible but the risk is not visible. Just because the last IPO has generated a positive over 10% returns on opening day, is it possible to assume the next IPO will also do well? Understanding of the process provides strength and resilience to manage ups and downs. Investments are based on short term outcomes can often create emotional, detrimental behaviour when tough times occur.

Tips and advice from unqualified people

Most people do not work on a plan when it comes to their finances. Investments are made randomly based on tips or tax savings.

Tips to make money are offered everywhere by colleagues, friends, relatives. Most of them do not know the fundamentals of investments. It is wiser to take the advice of qualified investment professionals who will guide you through the more technical areas of money management and investment.

Lack of clarity in the investment plans

Not knowing why we are investing in a specific investment vehicle is one of the biggest investment mistakes. Sometimes, it is made on family advice like buying a house or to save tax. Also, being scattered across multiple instruments making it difficult to track, review and manage.

Guidance from professional help in designing a suitably diversified investment portfolio that is aligned to financial goals provides a healthy rate of return and which at the same time is easy to review and rebalance.

Don’t confuse past returns with future expectations

Don’t make the mistake of basing your investment plan on historical average returns even if your investment time horizon is long term. Do not be blind by one aspect, you need to ascertain whether the investment product follows a methodology to gain from future developments. It is not an easy task and is effective only when the guidance of an expert who can assess valuations and future potential, is taken.

Most of the investors began investing in mutual funds through systematic investment plans (SIP). However, many of them are not making it right. The most common mistake is investing based on who is approaching them to sell a product rather than having a clear strategy.

Know when to get out

Buying and holding and dollar-cost averaging are sound strategies. But just because you have your investments on autopilot doesn’t mean you should ignore the forces at work.

Stay current with your investments and stay abreast of any changes in overall market conditions. You all want to know what is happening to the companies you invest in. By doing so, you will also be able to tell when it’s time to cut your losses, sell and move on to cut your next investment.

Over diversifying

Diversification is a valuable risk management tool, but only when used properly. One should not over diversify a portfolio that too in multiple investments of the same sector. Diversification beyond a point leads to greater risks and is difficult to monitor.

Do not treat insurance as an investment

The objectives of insurance and investment are different. Former is a corpus building – goal-oriented activity, latter protection against medical emergencies.

People tend to look at how much returns an insurance product can give rather than focusing on how much protection it is offering and at what price. Whether it is looking at life insurance more like savings and investment product or relying on an employer for health insurance, people tend to get insurance planning wrong. People also do not realize that insurance decisions will affect them in the long term.

Letting your emotions rule

Human beings are an emotional lot and much as we hate to admit it we are driven to action by our emotions. Financial decisions based on panic and fear normally end up with bad outcomes and lower returns. We despair that we do not have money and time to invest and yet do not hesitate in buying the latest state of things on EMIs. For example, we think we can not afford to buy the apple shares, but we are latching on to the new release of an iPhone in the market.

Entry and exit strategies for investments

Don’t make the investments randomly without proper entry and exit strategies. For example, an investor researches and identifies an attractive stock, but feels that it is overpriced. He or she might buy if the price decreases at certain level. This is an entry point. waiting for the right time to buy helps investors earn better returns. Determine both entry and exit points in advance because it’s an important for sustainable portfolio growth.

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