Having the right investments is essential for every individual to ensure that they have a sound investment portfolio. Having a good investment portfolio can ensure that the investors can earn maximum returns and increase their wealth. In order to make sure that investors get the best investment options in their kitty, there are certain common mistakes that have to be avoided, especially by novice investors.
Some of the most common mistakes that should be avoided by investors are mentioned below.
What are the most common mistakes to avoid while investing?
There are many investment options available to investors today. Choosing the right type of investment is based on many factors like investment style, budget, risk-return relationship, etc. There are many factors that have to be avoided to make good investments. Some of such mistakes are mentioned hereunder.
Lack of patience
Most investors make investments with a short-term perspective, especially when investments are made in equity markets or mutual funds. The slightest fluctuation in the returns can often drive the investors away from quality investments or can make them liquidate their assets for short-term gains. This often leads to them missing out on the long-term benefits of staying invested for longer durations. Investors have to understand that having patience and letting the investments grow is the key to generating wealth in the long term.
Putting all your eggs in one basket
Diversification is another important factor that has to be considered by the investors. Investing all their money in a single type of investment is very risky, especially if the investment is made in equity markets. Equity markets are prone to market volatility and hence can drain away from the capital investment as well in a bearish market. By investing in different types of multiple investment options, the investors can safeguard their investment portfolio and can earn better returns at reduced risk.
As mentioned above, diversification is essential for a sound portfolio. However, there is a fine line between diversification and over-diversification. Investors should not invest in multiple investments of similar nature just in the name of diversification. For example, if the investor is investing in large-cap funds, a maximum of two funds in this category is enough to generate good returns. Investing in 5 or 6 large-cap funds makes no sense as they will have more or less the same underlying equity stocks. Over-diversification in such cases will only increase the cost of investment and dilute the net returns of the investor.
Not investing according to your investment objective or investment style
Investors should invest in such options that match their investment style or their investment objectives. Failing to match the same will lead to unrealized expectations for the investment portfolio. Investors should select the investments based on factors like risk appetite, returns expectations, cost of investment, investment horizon, etc.
Focus on quality investments and not only on tax savings
Most investors invest only with the purpose of tax savings. This often leads them to make last-minute hasty investment decisions which may not always give them the best investment options. Hence, investors have to carefully select their investments based on careful research and analysis.
What are a few additional pointers to look out for?
Apart from avoiding the basic mistakes mentioned above, there are few other pointers that should be avoided by investors to ensure that they make better investment decisions. Some examples of such considerations are highlighted below.
- Not to be emotionally attached to an investment
Knowing when to exit the market or the investment is crucial to ensure positive returns or to limit the losses. Most investors get too emotional with their investments and do not exit them on a timely basis which is a grave mistake to be avoided.
- Not to make investment decisions based solely in past performance
Another important factor to be noted is that while the past performance of an investment is an essential consideration in the decision-making process, it cannot be the sole factor for investment. Past performance does not guarantee future returns and this point should always be remembered by investors.
- Not estimating the risks correctly
Underestimating the risks of an investment option is another serious error that has to be avoided at the time of making an investment decision. This has disastrous consequences and can potentially wipe out the entire corpus fund of the investors.
- Investing too rashly without safeguarding the retirement fund
Another crucial mistake often done by most beginners is investing without safeguarding their retirement fund. Youth is the time to take maximum risks in investments but is also the time to build a retirement fund or a nest egg that can assure that they are not left stranded in their old age. Hence, having a more or less guaranteed investment option that gradually builds their retirement fund is essential for every class of investors whether they are risk-averse or aggressive investors.
How to avoid these mistakes?
Here’s how you can avoid the above-mentioned common mistakes while investing:
- Research before investing: Take the time to research a company or investment opportunity before committing your money. Look at financial statements, news articles, and analyst reports to get a better understanding of the risks and potential rewards.
- Focus on long-term goals: Set specific long-term investment goals and create a plan to achieve them. Don’t get sidetracked by short-term market fluctuations or noise.
- Keep emotions in check: Avoid making emotional investment decisions based on fear or greed. Stick to your investment plan and avoid buying or selling based on market hype or panic.
- Diversify your portfolio: Spread your investments across different asset classes, industries, and geographies to reduce risk and increase potential returns.
- Avoid market timing: Don’t try to time the market or make frequent trades. Instead, focus on long-term investing strategies that can help you weather market fluctuations.
- Have a clear investment plan: Develop a clear investment plan with specific goals, timelines, and strategies. Regularly review and adjust your plan as needed to stay on track.
Understanding the nature of various investments and understanding their risks and return relationship is one of the crucial factors influencing investment decisions. This is also one of the major areas where novice investors often make grave errors. Having a thorough knowledge about different types of investment and their expectations is the key to have a good investment portfolio free from any basic investing mistakes.
1. What is the optimum number of investments in an investment portfolio?
A. Most experts consider having a maximum of 6 to 8 investments of different classes to be the ideal number of investments under a good portfolio. This may include one or two funds from large-cap, mid-cap, and small-cap categories each, one or 2 debt funds, a fixed deposit, ETFs or index funds, etc.
2. Is it advisable to make investment decisions based on the portfolio of another investor?
A, No. Making investment decisions based on someone’s advice or imitating their portfolio is a serious error of judgment while building one’s portfolio. Every individual has their own set of risk-return expectations and investment budget or the time period that they want to stay invested for. These factors are individual specific and hence can lead to wrong investment decisions.