Common Mistake to avoide

8/14/2019 Common Mistake to avoide

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Common Mistakes to Avoid

Here is one secret to wealth creation that is probably least understood. ‘Success in the game of investing

depends more on not making big mistakes than it does on picking big winners’. Simply meaning, if you avoid the

common but big mistakes that most investors make, you would be successful in your investments.

In this issue, we would talk about what crucial mistakes do we as investors make which ultimately impacts our

investment performance. These common misapprehensions erode our profits and make us make decisions

which are not in our full interests. Getting over these mistakes and instead framing our own set of principles to

follow would help us greatly in our investments.

Common Mistakes to Avoid

1. Follow the ‘Hot Tips’

Quite often the investors rely on the ‘hot tips’ that they get in the markets. The ‘hot tips’ generally come from

the friends, relatives and/or the stock brokers. We trust these people with our investments and also believe

that they have made it good in the markets in the past. After seeing a hot tip work out, we may even

become ardent followers of such ‘Smart Hero’. However, such smart heroes are rarely consistent in what

they predict. Quiet often it is a case of getting plain lucky more than anything else. In reality, there are very

few big smart investing heroes worth the word.

To Do: Make your own investment decisions after study & exploration and try not to react to the ‘hot

tips’ or ‘inside news’

2. Invest for short timeInvesting for a short investment horizon is another mistake that the investors do. Often the investment

horizon of the investors ranges from couple of weeks to about 6 months or so. This means that if the

investment does not perform as expected during the initial months, chances are that they may be offloaded

within 2 to 6 months. Further still, even long-term money would be withdrawn at regular intervals to meet

some general household purchases. Thus the investments fail to accumulate to a big size over time. In

general, the investors do not have the patience to hold ground over time and stick to their investments for a

long term. This is possibly the most common and obvious misuse of time. Investing for the long term will get

you the ‘Power of Compounding’ and more certainty on how much returns you make. Past history has

shown that the Sensex has given over 18% CAGR in the past 26 years and those investing for really long-

term never had any regrets.

To do: For wealth creation, broaden your investment horizon & give suitable time for your investments

to grow

3. Buy only the ‘hot’ ones

Most of us find it difficult to buy into an investment and stay with it. We all always look elsewhere trying to

find the latest and the greatest. Quite often the investors get only interested in companies or funds that

appear to be attractive, are often in news, or belong to the more happening industries or fund houses.



Such investors feel that such stocks/funds are the hot ones that need to be followed and ignore the other

options available to them. Funds and stocks that have performed steadily & well but belonging to the less

attractive industries/fund houses do not get that much attention from the retail investors. They find such

stocks/funds to be boring and less exciting for investments. As investors we should not let our personal

favoritism or biasness overshadow our investment decisions. Even if a stock or fund is performing steadily

well, it is a better option than a stock or fund that at t imes gives you high returns but is volatile.

To do: Let not favoritism or only past performance guide your decisions. Study the present & the

potential for future.

4. Non-Diversification

Non-diversification or diversification less than what is required is another common mistake done by most of

the investors. Non-diversification increases the downside risks to an investment portfolio. Your portfolio

returns are commanded increasingly by a select few investments and your fortunes are tied with those of

your selected stocks / funds. Diversification is recommended at various levels as follows …

Diversification at Asset class level – Debt, Equity, Physical Assets, etc

Diversification at Product level – Diversified Equity Funds, Direct Equity, ELSS, Sector Funds, Bank

Deposits, Liquid / Floating / Gilt Funds, RBI Bonds and so on …

Other types of Diversification

>> Industry or Sector >> Issuer / AMC or Fund house

>> Market Capitalisation >> Fund house investment style

As investors we should aim at diversification to a reasonable extent such that the portfolio has reduced

overall risk and is also manageable.

To do: Do not keep all your eggs in one basket. Diversify and reduce the un-systematic or the

stock/fund-specific risks

5. Mixing emotions with investments

While making investment decisions, most of us subconsciously mix our emotions with the decisions. Often it

becomes difficult for us to not fall in the trap of ‘Fear, Greed & Hope’. Decisions taken with emotions often

lead us in taking the wrong decisions at the wrong time. Typically we end up doing the following …

Not buying for the fear of further falls, when the stocks are at low – Fear

Buying when the prices have risen looking at the past performance or the returns others have made or

still holding on for more when the prices have already risen – Greed

Holding on to the investments hoping they will recover to the past highs – Hope

Our emotions are probably our biggest enemies when it comes to investing. Wise investors rarely keep

themselves attached emotionally with their holdings and are always ready to take big decisions should the

time come.

To do: Be emotionless and logical and make decisions based on facts without any bias or favoritism

6. Predicting the markets

You can get lucky, but you can’t always remain on top of the markets. The markets are very dynamic and

they not necessarily act logically in the short term. Often multiple factors including sentiments are at plays

which are very difficult to predict consistently in the short term. You may even compare the task of

predicting markets with that of tossing a coin where you may be right half of the time and wrong at other

times. Studies in past have shown that ‘timing the markets’ contributes only 2% to the long-term

performance of your investments.



Still people try and waste more time & energy in timing the markets. From the investment point of view there

is clear distinction between investors and traders where traders are for short-term and investors are for

long-term.

To do: Be smarter and try not to time the markets. It is the time that matters and not the timing. .

7. Not getting the Asset Allocation right

‘Penny wise and pound foolish’. Probably this proverb reflects the way we invest the best way. Often we are

too concerned on our investments into equities and we try and track the same very often. But rarely do we

actually sit and study our overall investment portfolio taking into consideration investments in PPF, RBI

Bonds, Gold, Property, Private equity, Bank deposits, Insurance, Postal savings and so on. Surprisingly,

equities would only be a miniscule part of our total investments. Study has shown that the average Indian

investor is has only 2% exposure to investments in equities of his overall household savings.

As investors, if we really want to build wealth over long time, the best way to start today is by deciding the

right asset allocation that you would follow for your overall portfolio, taking into consideration all your

investments. Study has shown that the Asset Allocation contributes about 92% in the overall performance of

your portfolio in the long run while security selection would only contribute about 6% of your portfolio. Asset

Allocation is a universally followed, well accepted and very effective way of creating wealth over time –

much superior to other strategies of market timing and superior stock selection.

To do: Get your overall Asset Allocation right today. Follow the Asset Allocation principle for wealth

creation.

Successful investors & professionals avoid these common mistakes and remain more disciplined and focussed

on their investments. They are not swayed by what others say and are confident on their own understanding

and ability to make decisions and ride through the rough times. Even we as investors we should avoid such

mistakes and try to be more disciplined in our approach. We should have trust in the age old saying ‘slow andsteady, wins the race’ and practice the same on our investments.

DISCLAIMER:

All rights reserved. Any unauthorized use, reproduction or disclosure is prohibited. This article has been prepared and issued by NJ

IndiaInvest and/or one of its affiliates. The information herein was obtained from various sources; we do not guarantee its accuracy or

completeness. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any

securities or any related investments.

This article is prepared for general circulation and is circulated for general information only. It does not have regard to the specific

investment objectives, financial situation and the particular needs of any specific person who may receive this article. Investors should seek

financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in thisreport and should understand that statements regarding future prospects may not be realized. Investors should note that income from such

securities, if any, may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than

originally invested. Past performance is not necessarily a guide to future performance.

For More Details Contact :Ms Ami Chitral Shahemail id : [email protected] : 9869424869

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Common Mistake to avoide