Seven common mistakes that investors should avoid

Have a long-term outlook | Timing investment is logically impossible because the best entry and exit opportunities are known only in hindsight. No one can predict market movements with certainty. Therefore, it is important to allow your investments to compound over a long term.

Naval Goel

Mistakes are common. People are expected to learn from them. Smart people learn from other people’s mistakes. Listed below are some common mistakes that investors should refrain from.

1. Do not invest if you do not have a well-laid plan

Investment requires a lot of careful planning. Your financial goals should dictate your investment strategy. Several investors, especially the new ones follow the trend, or they choose based on mere hearsay.

Set a plan, check if it is feasible and plan your investments accordingly. Here are a few tips:

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Naval Goel

Founder & CEO|PolicyX.com

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• Set realistic financial goals- both short-term and long-term.
• Examine your risk appetite based on your age, future earning capacity and the possible consequences in the future (e.g.: the arrival of a child, etc.)
• Expand your investment portfolio into different asset classes based on your risk appetite. Make sure the risk is spread across all asset classes.

2. Do not use margin

Using borrowed money to buy securities is called margin. Margins can give you a good profit, but it can also heighten your losses. When using a margin, if the investment does not take off as planned, you will end up with a massive debt.

Margins are for professional investors and hence should ultimately be avoided if you do not have the time or the expertise to monitor your positions carefully.

3. Do not invest until you understand your investment completely

A thorough research is essential before you invest. Refer to your reading material and treat is as your guideline. Each person has a different investment plan. Do not rely on a friend’s or a family member’s investment plan.

Apply your research information wisely when you plan your investments. If you are likely to invest in stock, apart from understanding the industry you should also have an in-depth knowledge of the company you are keen on investing and the risks. Do your home-work well, no short cuts please.

4. Do not follow what you hear

Often you hear your friends or family talk about the possible rise of a stock or a company that is set to launch a new product and their predictions in the market for the same. Even if such talk has some truth to it, the public anticipation does not translate to reality. Do not trust hearsay until you verify it yourself.

Every stock tip need not necessarily be met with hesitation. Every time you come across such tips:
• Verify the facts
• Check with the company if needed
• Approach other experienced investors
• Check with some genuine financial advisors

5. Do not put all your eggs in a single basket

Even a new investor knows that diversification is a good way to manage risks. But many investors fail to comprehend the right ways to diversify. It is advantageous only when the purchased new asset has an entirely different risk profile.

The assets that you choose to invest in should have nil or less correlation. This kind of non- related market investments is an excellent risk management tool.

An investor’s goal should be to add independent assets with different risk profiles for excellent risk management skills. This with other sound investment techniques can improve your technique.

6. Day trading is only for the well-experienced investors

Day trading is intriguing even for the seasoned investors at times. It is considered a dangerous game and it is for the knowledgeable and experienced investors. When you are into day trading, you will need an enormous amount of money to balance the day trading strategy.

Unless the investor has an in-depth knowledge of the nuances of the day trade, it is safe to stay away from it. It also involves a high-level of risks and not to mention the stress associated with it. If you are looking for quick ways to build wealth, there are much better options.

7. Do not invest in stocks that appear cheap

Investors have the standard practice of comparing the prevailing share price of the stock with the 52-week high of the stock. For these people, a fall in the share price makes it an attractive buy. This is not the right approach to pick a stock.

The value of the company’s price share in the previous year will not let help the investor earn more money in the current year. It is wise to analyse the reasons for the fall of the stock.

In some cases, a decline in the prices could be due to various adverse circumstances like changes in leadership and increased competition. There could be several other reasons that can cause the downfall of the price of the stock. A low share price is only a false signal to invest in stock.

It is wise to avoid stocks that may seem like a bargain. Most stocks that decline have a solid reason for that. A smart investor will always analyse the assets details before he invests in them. The companies that have more probability of sustained growth in the future must be chosen.

Conclusion

An investor’s investment style should always coincide with his or her personal goals. There is no set formula for investment planning that will lead to success. An investor should choose an investment strategy that suits his skills, values, tolerance to risk and goals. Each one of us has a unique way to attain financial freedom.

The writer is founder & CEO of PolicyX.com