Five common investment mistakes to avoid

However, what separates them from regular investors is that they don't try to get even with their investments.

August 26, 2013 12:31 IST | India Infoline News Service

Ever noticed how most investment advice is centred around telling investors what they must do. But the opposite i.e. what investors must refrain from doing is as relevant. In this article, we list five common investment mistakes that investors must avoid.

1. Trying to get even with investments

Even the best of investors end up making poor investment decisions once in a while. However, what separates them from regular investors is that they don't try to get even with their investments. Investors must be patient and give their investments sufficient time to prove themselves. However, if a subsequent evaluation reveals that an investment has failed to deliver as anticipated, investors should not hesitate to cut losses and exit the investment. Staying invested in a ‘dud’, hoping to get even (read recover losses and eventually exit at a profit) may further aggravate the situation. The key lies in being dispassionate while making investment decisions.

2. Investing in top performers based solely on performance

Surprised? Isn’t investing in top performers always a good idea? Not necessarily! This one is applicable to investors in market-linked avenues like mutual funds. When investments are made based solely on performance, an important evaluation parameter is overlooked – risk. And investing in line with one’s risk appetite is a fundamental tenet of investing.

Investors must try to understand the reason behind the impressive showing. This in turn will help them evaluate if the performance is sustainable. Consider a situation wherein a fund’s performance can be attributed to simply riding rising markets by investing in stocks that are the season's flavour. In such a case, the impressive performance is unlikely to be sustainable over the long haul and hence is misleading for investors. Therefore, making investments based solely on the performance is fraught with risks.

3. Investing in an ad hoc manner

Several investors believe that the investment process begins with making an investment. Crucial steps like setting investment goals and creating investment plans are overlooked. Ideally, the investment process must begin with setting tangible goals, followed by the drawing up of an investment plan. Making an investment should be the result of the aforementioned and not the starting point.

Investing without goals and plans, amounts to investing in an ad hoc manner. As a result, investments may become directionless and fail to achieve desired results. Investors must appreciate that investments are not an ‘end’, rather they are ‘means to achieve an end’. Hence, the importance of having goals and plans in place at the outset.

4. Mirroring someone else’s investments

While it’s one thing to ape someone else’s lifestyle choices, using the same approach to investing might be stretching things a bit too far. Investing in this manner can have disastrous results. Investing is a personalised activity. Consequently, the investment avenues chosen have to be right for the investor. They should mirror his risk-taking ability and investment goals. What might be suited for one investor could be completely unsuitable for another. For instance, the investment portfolio of a retiree seeking assured monthly income cannot be the same as that of a risk-taking investor who intends to build a retirement kitty. Simply put, investors would do well not to mirror someone else’s investments. Instead, they must seek investments that are right for them.

5. Not reviewing the portfolio

We have already discussed the importance of holding an apt investment portfolio. Similarly, the importance of conducting periodic portfolio reviews cannot be overstated either. Investing isn’t a one-time activity. After creating a portfolio, monitoring its performance is as vital. Furthermore, the review should be conducted in a timely manner, so that deviations (if any) can be identified and rectified.

A portfolio review is also necessitated by a change in the investor’s risk profile and needs. 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.

The author is Senior Research Analyst, Morningstar India

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