Feb 20, 2013 12:31 PM IST | Source:

4 financial blunders you should never make

With markets near their all-time high, investors are confused about how to proceed.

With markets near their all-time high, investors are confused about how to proceed.

1. Never buy at the peak or sell at the bottom:

Intuition tells you to follow trends. We get tricked in by our own emotions driven largely by the crowd. We get exuberant when something is doing well and want to buy more of it and we feel sad when something is not doing well. This makes us to buy high and sell low - the opposite of what we should be doing, resulting in losses.

So what should you do?

Buy when markets are low and sell when markets are high. Control your emotions and inculcate investment discipline. You are investing for your financial goals, follow the goal schedule.

2. Never forget to review and rebalance your portfolio:

Reviewing your portfolio once a year is a must. Rebalancing is an automatic way of buying low and selling high without emotions getting in your way. The solution to point 1 above.

But before that, you need to have the asset allocation in place. Determine your risk appetite and build a proportionate allocation of how much money should be invested in equity, debt, real estate, gold and cash.

Once this is carried out then on a periodic basis, you should evaluate if your proportion has altered significantly. If it has, then redistribute the money in a way to reflect the original proportions. This is what rebalancing is all about.

So what should you do?

Rebalance. To do so, more money can be invested in one of the asset classes or money can be withdrawn from the asset which has grown higher and put back into what has grown lower.

3. Never blindly follow advice from neighbours, relatives, insurance agents:

Charles Kindleberger, author of Manias, Panics and Crashes says, "There is nothing so disturbing to one's well being and judgement than to see a friend get rich."

And this leads us to take advice from these friends/ family/ relatives. Of course, there is an implicit trust with these members which we depend upon. But then you have to realize what is good for them may not be good for you. And in the case of an insurance agent, you should definitely think twice before following their advice.

So what should you do?

Friends/Family/Relatives cannot provide you dedicated time to understand your needs or help you in ongoing way. You have different goals and risk taking abilities. And what you invest in should reflect your needs.

4. Never think an unbiased planner is not worth the fee:

Mind you, we are talking about an unbiased financial planner or investment advisor and not a broker, distributor who sell you products like equity, insurance, mutual funds. Before you buy a product, you need to have a financial plan in place along with an asset allocation that will determine what should you buy and how much. This is what a independent investment advisor will do for you.

An independent investment advisor or planner brings discipline and clarity to the investment process and helps you avoid all the behavioral traps listed above that can impede your ability to realize your financial goals.

An independent investment advisor or planner will charge you fees. Do not shy from that as this helps him to maintain the unbiasedness required to build the right plan for you.

What should you do?

Build a Financial Plan from an unbiased planner as soon as possible.

PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm

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