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7 mistakes to avoid when investing

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Investment is an area where you just cannot afford to go wrong. Here’s a list of the seven common investing mistakes that you should avoid at any cost.

Confusing between trading and investing
This is perhaps the most basic confusion that you should get rid of, otherwise you will make big losses and lose confidence to try again. Trading involves a higher element of risk that requires expertise and experience, and is not for an amateur investor who goes by the rule book. Frankly speaking, trading might not help you build long-term wealth, but could bring good money to your broker. So it is important to understand the basic differences between trading and investing before taking the plunge.

Investing takes a lot more research and well-thought planning in the different avenues of the investment. Your investment amount, your investment goal, your risk appetite, the present market conditions and some basic studies about the future of the markets and many other factors go into making the best investment strategy for you.

Taking a very conservative stand
Most people prefer to take a very conservative stand and invest in traditional products like bank deposits, public provident fund (PPF) and so on. Their argument is that the traditional products ensure guaranteed returns though they are comparatively lower than returns from stocks or mutual funds or equities.

However, a good investment is not only about guaranteed returns but about real returns. Real returns are returns post inflation. And it is always better to calculate these real returns with an expert’s help considering the complexities involved in today’s economic scenario, especially inflation.

Taking a very aggressive stand
Not taking a very conservative stand doesn’t mean you should play aggressive in the markets. An investor is bound to lose money even if he chooses to take a very aggressive stand by investing his money in high-risk avenues such as equities without even taking enough care to understand how they work. The middle path is always better so that you can always make changes to your investment basket according to market conditions.

Holding on to the dud stocks
This is one of the most common mistakes some investors make—holding on to dud stocks. A dud stock need not necessarily mean only non-performing stock; it could also mean purchasing stocks of unheard companies. Never buy stocks of unheard companies even if they are doing well while you are planning to buy them. It could well be just a short-term stint because these unheard companies never have in them the thing to perform well on a long term and their stocks might soon turn out to be duds. There are many instances of such companies and their stocks turning dud over a period of time.

Hence, it is important to invest in performing stocks, and at the same time have a backing from a good fund manager. For example, you could invest regularly in small amounts through systematic investment plans (SIPs) and make money by holding on to them for a long term.

Asset allocation holds the key
Your investment basket should be filled with the right type of assets for good long-term returns. And remember to fine-tune the basket at regular intervals depending on how the market behaves and in line with your risk appetite and financial goals. Improper asset allocation like investing in too much of debt for the long-term or irregular investments in equity for the coming quarters could put you in an awkward position and leave you with no or little returns.

Timing the market
This is one area where even the experts fumble. Markets are highly unpredictable even in the short to medium terms. Though there are some parameters to predict the market, like the changes to the country’s socioeconomic, political and business spectrums, there is no fixed rule to say how markets would react to these turn of events. Hence, it is advisable to stay away from reading too much into such parameters while timing the markets. Instead, you could go in for a closely controlled investment strategy that could help you make money in the long term.

Overconfidence
Ask the long-term players in the markets and they will perhaps warn you against being overconfident with recent successes. There is nothing wrong in hoping for the best times but overconfidence is something an investor should do away with. It is important to understand that your recent successes in the markets could have been due to many ‘hidden’ factors that might have escaped your attention. Overconfidence in your so called ‘perfect management of portfolio’ might spell trouble and you might end up losing money.

Disclaimer: All information in this article has been provided by BankBazaar.com and NDTV Profit is not responsible for the accuracy and completeness of the same.

Story first published on: December 28, 2012 07:40 (IST)

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