In the process of investing, one often makes mistakes.
Here are some of the most common investing mistakes which investors generally make and some of which even I had made in the earlier part of my investment years
Of course, learning from the mistakes, continually, the investing experience has truly been rewarding experience. You can alsocultivate good habitsof investing by avoiding the following mistakes.
This series is in continuation to the earlier post which contains the first 3 common mistakes committed by investors. You can read the Part I here. (Costly Investment mistakes to avoid at all costs – Part I)
This post will throw light on the following common mistakes generally committed by investors:
#4. No “Homework” before getting into Investments, and learning costly lessons afterwards: Lack of understanding
Doing what’s right is not the problem. It is knowing what is right.
This mistake is akin to putting the cart before the horse. Adequate homework needs to be done before investing in any financial products (eg: Stocks, Mutual Funds, Real Estate, ULIP’s, Child Insurance Plans, PPF or even FD’s for that matter) .
You should understand the products well, understand the risk-reward ratio, understand the expenses
involved, tax implications, and do not easily buy an investment just because someone wants you to buy it. You need make sure that the investment objective and risk tolerance are compatible with your investment goals.
Even the world’s greatest investor Warren Buffet core philosophyis to not investin business models which hedoes not understand. Obviously, being the world’s most successful investor,there is wisdom in what he says.
#5. Not getting the basic difference between Saving and Investments
Many investors do not understand this basic principle. Getting this right is one of the key principles to wealth generation.
Savingis when you try to build funds for some needs, like maybe purchasing a house or going for overseas vacation. Once the adequate target is achieved, you withdraw the whole amount (Capital engaged + Income generated from the capital involved), and then spend it. Then you have nothing left and the process of investment needs to begin all over again.
For building wealth, the above strategy does not work. This is where the process of investment needs to be understood. (This strategy is similar to preached by worlds famous investors like Benjamin Graham, Phil Fisher, and Warren Buffet etc.)
Investmentis when you try to build funds with the help of assets which in turn also produce income year after year. In this you invest in assets like shares and property. The income generated can be taken out whenever needed or reinvested. However themajor portion of the capital stays put. It stays there to keep growing and compounding which in turn producing more and more income every year.
This process will take a lot of time. It requiressolid discipline and immense patience. However , as the years go by , the additional income stream from investments can supplement your earning potential to a large extent.
To be contd Part III. You can read part III of the series here. Click here for Part III