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 also cultivate good habits of investing by avoiding the following mistakes.
This series is in continuation to the earlier 2 posts which contains the first 5 common mistakes committed by investors. You can read posts here at ( Part I and Part II )
This post ( Part III ) will throw light on the following common mistakes generally committed by investors:
#6. Having Unrealistic Expectations from Investments & Wrong understanding of Risk
Indexes (Sensex and Nifty) have gained more than 85% returns from the lows of March 2009. All the TV channels and newspaper headlines have started to focus on this aspect a lot andfuel greedin common people. Similarly just 2 months earlier to March 2009, or so, when there seemed no end to the global markets falling down, were down more than -ve 50% , the same TV channels and newspapers were fueling fearsinto the minds of the people.
Expecting similar returns consistently from the stock markets is one of the common mistakes. This happens when expectations from the market are unrealistic (like doubling money in 1 year. etc).
The other side is when there is fear in the markets there perception that markets are extremely risky and all investments should be moved to safe instruments like FD’s etc.
Point is :
Markets test patience and reward conviction.
1. Equity Markets cannot keep rising 100% year on year every year & cannot keep falling 50% year on year every year.
2. There are various phases to the markets, long periods of range bounded ness, sudden spurts either up or down due to sentiments, global factors etc. All this causes violent moves in the markets in short term. In the long run or long periods of time 5yr, 10yr, 15yr the ups and downs and returns from the marketseven outtoyield mean (or average) realistic returns. Being aware of this point is important.
3.Riskin equity marketsappears very highin short period of time. HoweverRisk in Equity markets is reduced significantly when investments are spread over long periods of time.
4. Risk and Returns are inseparable. Once the objective is clear which is get better returns over a period of time, then you must be willing to invest in instruments which carry more risk, intelligently. And marry the risk with passage of time to yield good returns.
#7. Leaving Investments in Auto Mode – No Periodic Assessment, No periodic Re balancing
You do periodic health checkup with the objective of finding if there is any need to take preventive measures to keep the body in good shape. If you are gaining weight and becoming overweight, you need to start taking steps to cut down on the weight. Similarly, if you are losing weight and have become underweight, you need to start taking steps to regain health.
Similarly, periodic assessment of portfolio (once a quarter, every 6 months at least) is necessary. This has to be done with the similar objective of taking preventive measures (if at all required) to keep the portfolio in good shape. Portfolio rebalancing has to be done as per asset allocation.
However, many investors make mistake of leaving the portfolio in auto mode once the investments have been made. Investments is indeed a long term process, but If some investment goes sour, and it is not acted upon in a timely manner, it probably becomes too late / or too costly to get the portfolio back on track , if preventive measures are not planned and executed.
Final Part to be contd…… You can read the final installment here at Part IV