4 often repeated investing mistakes

What you are doing wrong can severely affect your portfolio. Here are some measures you should protect yourself against.
By Himanshu Srivastava |  15-09-17 | 
 
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About the Author
Himanshu Srivastava is a Research Analyst with Morningstar. He would like to hear from you, but cannot give financial advice.

To err maybe human, but it is also a critical part of any learning process. This is applicable in the realm of investing too. While it’s impossible to always make the right choices, the best that investors can do is avoid common investment mistakes which could hurt their investments and hamper their prospects of long-term wealth creation.

Fortunately, most of these investment mistakes are well documented. Unfortunately, they continue to be often repeated. Here we discuss four common ones that investors must avoid.

Investing without planning

Planning is the foundation of investing; the first principle, and sadly the most flouted one. Investing demands discipline and that requires planning. This involves - setting tangible goals, assessing one’s risk appetite, creating an investment plan and then executing it.

Unfortunately, most of the investors believe that the investment process begins with making investments, which is essentially the last step of a financial planning exercise. Many investors mistakenly believe that planning is required only when they have substantial monies to invest. What they fail to understand is that this is exactly the reason why one should plan their investments.

The pitfalls of not planning while making investments are huge. This results in making investments in an ad hoc manner and such investments are directionless often failing to achieve desired results. It should be well understood that investments are not an end, rather they are means to achieve an end. Hence, it is critical to plan one’s investments at the onset.

Making an investment decision based on market levels

This is apt in the current scenario. With the Indian stock market witnessing almost a secular bull run for some time now, investors are confused as to how to proceed with their investments i.e. whether to invest, redeem or wait. While those wanting to invest are wary of high valuations and waiting for a correction, those wanting to redeem are waiting for the markets to move up further. But then there is no certainty where the markets are headed. This uncertain nature of the market is exactly the reason it is an unreliable factor to base one’s investment decision on. Simply put, consistently timing the market accurately is impossible. Therefore, instead of doing that, investors should divert their energy towards setting their investment goals, selecting the right strategies and spreading their investment risks.

Systematic investment plan, or SIP, is an effective investment method to counter the temptation of market timing. Apart from instilling a sense of discipline, rupee-cost averaging can help investors benefit from downturns as well.

 Chasing trends

Let’s first understand what it means. The mutual fund industry has often witnessed various trends emerging at different points in time. A trend here could be an investment pattern when a segment or sector suddenly hits a purple patch, catching investors’ fancy and leading to substantial inflows.

For instance, during 1998-99, technology stocks started doing well resulting in many fund houses launching technology sector funds thus attracting many investors. Similarly, 2004-07 was the period when infrastructure sector became a fad resulting in many fund houses launching infrastructure funds. The problem here is that, these trends which are widely marketed and talked about, however, rarely is their suitability for investors discussed or understood. For example, irrespective of any sector’s popularity, a sector fund is apt only for investors who understand the underlying sector’s dynamics and can time their entry and exit from the fund.

Similarly, huge inflows into mid/small-cap funds don’t make them apt for all investors given their high-risk high return nature; or gilt fund’s doing significantly well during down interest rate scenario doesn’t merit an automatic entry in the portfolio of every investor.

Investing based on these trends is risky as it ignores the product’s aptness for investor, thereby making it a poor strategy. While these trends may look like hot tips, they can have disastrous results and hence they are better avoided.

Investing and forgetting

Investing is a dynamic exercise. It’s not a one-time activity that one can do and forget. Hence, conducting periodic reviews is critical to ensuring the veracity of the investment portfolio. Further, the review should be conducted in a timely manner, so that deviations (if any) can be identified and rectified.

Review process is also conducted to understand the weak link in the portfolio. For instance, if a fund fails to play its role in the portfolio for which it was included, it needs to be replaced. Also, a change in the fund’s strategy may render it unsuitable for the portfolio warranting, a replacement. Change in the investor’s needs and risk appetite also necessitates a portfolio review process. With passage of time, a new set of needs may emerge; also, the investor’s risk-taking ability might change. The portfolio should be suitably modified to incorporate these changes. Ideally, the investment advisor must play a significant part and aid the investor in the review process.

This post initially appeared in The Deccan Herald. 

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