7 investing mistakes to avoid

Making a mistake is inevitable in any sphere of life. But some are avoidable, especially when it comes to your money. Some investing mistakes are committed on account of predisposed notions and human biases. In this article, we discuss some investing mistakes that investors should avoid and how they can overcome human biases when investing. 

1. Investing without a goal or risk appetite assessment: As a beginner investor, deciding the objective behind investing your savings is significant. Consider your essential expenses like rent, utilities, and food, calculate your lifestyle savings, and subtract them from your income. The balance of your savings should be invested. But consider what you want to spend those invested savings on. If you want a car in 5 years, a home in 10, and retire in 30, investing must be done based on these time horizons. Further, a sum should be set aside for emergencies. If this kind of planning is not done, you may end up investing in instruments that don't match your investment objective or time horizon, leading to a mismatch in cash flow, lost return opportunities, etc. Knowing your investment goals also helps you stay focused and disciplined in your investment journey.
2. Risk appetite: Risk appetite is equally essential, and it comprises 2 parts - risk-taking ability and attitude towards risk. Risk-taking ability depends on things like if there's anyone dependent on you, how many sources of income you have, or if you depend on only your investments for your daily income. If your risk-taking capability is low but you have a risk-on attitude and invest in Equities, you may have to sell Equities to meet specific cash flow at a less than reasonable time, which may lead to you losing money. Hence, one must take a holistic approach and assess their risk appetite. 
3. Investing without doing proper due diligence: It is essential to check whether the goal you're investing in or your investment objective is aligned with the investment you're looking to make. For that, you need to do proper due diligence. 
4. Trying to time the market: Market wizard Peter Lynch said, "Far more money has been lost by investors trying to anticipate corrections than in the corrections themselves." Though tempting, trying to time the market is a futile exercise. Doing a Systematic Investment Plan or SIP is the best way to invest to help ride the volatility associated with Equity markets. 
5. Reshuffling your investments too often: As an investor, looking for tips on the "next hot stock" or the next "multi-bagger" is also tempting. This can lead you to keep buying and selling. However, making decisions based on rumours like these is not advisable. Frequent churning increases costs, and rumours may only become true sometimes.
6. Stop investing when the markets are down: Market downcycles often create panic and anxiety. Investors tend to flee from the market during downturns. However, as SIP investors, you should ride the volatility and consider the downturn a time to buy into the markets at lower valuations. 
7. Putting all your eggs in one basket: Not all asset classes perform in tandem. Winners rotate. Equities may perform well for 3 years, debt for a year after that, and gold for a year. Hence, it's essential to diversify your investments and make a proper asset allocation.
8. Not considering the impact of inflation on investment and returns: Inflation can erode the purchasing power of money. Hence, investing in instruments that help protect that and give inflation-beating returns is important. This is an important determinant when deciding where to invest. 

 

Disclaimer

Mutual fund investments are subject to market risks, read all scheme related documents carefully.