No one is perfect and making mistakes is a part of the learning curve. Amateurs may tend to make mistakes, be it from learning how to drive a car to planning your investment path. This does not signify that experienced investors have never made a mistake. However, it is important to know, avoid and rectify some common investment mistakes which may deter you from applying investment sense.
It is important to avert these common 7 mistakes for making great investments.
Not having clear investment goals
Goals are important to set which provide us the path to achieve them. Investment goals are no different. The most common investment mistake is not having clarity about your investment goals. An appropriate investment goal should be measurable and achievable. The foundation for a sound investment strategy begins by framing the investor’s objective. Investment goals might range from accumulating corpus for retirement, for kids higher education, for an overseas holiday, for a child’s wedding, etc. Different investment goals need different investment strategies based on the short term or long term attainable goals.
Being too conservative
Relying completely on conservative forms of investment or saving schemes is yet another form of financial mistake. Investing purely into conservative investments like PPF, Bank Saving Schemes, Post Office Schemes, Fixed Deposits, etc. may build a sustainable corpus with constant returns which may suit short term or medium term goals for people with low risk appetite. Young investors should dare to invest in equity based investments which offer exuberant returns over a longer period of time as per historical data. Investing completely in conservative schemes of investment may not fetch you great returns. However, it does not mean that one needs to invest 100% of the money in equities or other non conservative investments where the risk is certainly more, but at least there has to be an ideal mix between the conservative and high yield providing investment schemes.
Keeping Aside Insurance
Ignoring insurance and treating it merely as an expense or a tax saving tool is a grave mistake. Insurance takes care of uncertain events like death, disability, disease, loss of income, etc. It is imperative to have basic insurance policies like Term Plan, Health Insurance Plan, Critical Illness Plan as a part of your financial planning portfolio. With insurance plans, any uncertain exigencies will not hinder your future financial goals and will keep you moving to attain them.
Failing to Diversify
Diversification implies keeping your money invested across different types of portfolios like bonds, stocks, real estate, jewellery, bullion, etc. Diversification is important as it creates a balance between different investments. In case there is a dip in the value of one investment, there are other investments to balance out the fall. Diversification helps in balancing and safeguarding you from a sudden fall in the value of your investments by gain in the value of other investments.
Not reviewing your Investments periodically
Not reviewing or rebalancing your investment portfolio periodically is yet another mistake one may regret later and ignoring to review your investments may defeat your investment goals. Returns on investments depend on many factors which keep on changing like market trends which change, economical, financial and political frameworks which change like the latest wave of “Demonetisation”, which impacts one's investment portfolio. Even at the micro level, the scenarios do change like there is a salary increment, there is a windfall gain, there is an unpredicted financial disbursement, etc. which cannot be overlooked as far as investments are concerned. Reviewing the investment allocation is important because the returns from different investment schemes can vary. Rebalancing reinstates the investment portfolio too, thereby helping in monitoring the risk and the returns time to time.
Not Accounting Inflation
Not accounting for inflation is another major investment mistake. Prices are increasing for almost everything. What Rs 2000 can fetch you today is not the scenario 10 years down the line. It is important to include inflation in the investment equation as you set your investment goals. Example: After 15 years with 5 per cent nominal rate of inflation, Rs 1 crore will fetch you goods and services worth only about Rs 48 lakh only. It is better to open your eyes now to accustom inflation rather than regretting later.
Paying High Commissions
Financial planners, brokers, advisors don’t offer you their services free of charge. Different financial intermediaries charge different fees when you buy and sell investments. Avoid paying high commissions or brokerages which means a part of your money is not going into your kitty. Apart from charging high commissions, sometimes the financial advisors will pitch you investments which fetch them the maximum returns rather than helping you with your goal based investment. It is important to take a second opinion and opt for investment opportunities that come with little or no transaction fees.
Averting these investment mistakes will certainly help you to get the desired return on your investment and help you to achieve your investment goals. Take time to review,assess and research about your investments on your own rather than blindly depending upon financial advisors or your peers.
The author, Harjot Singh Narula, Founder & CEO, www.comparepolicy.com.