1. No Plan?
Most of the investors take investment decisions without any long-term financial plan in mind. A long-term plan is based on life goals, assets, liabilities, income, and expenses. Example: Goal to accumulate Rs 10 crores by retirement (age 65), a goal to accumulate Rs 25 lacs for child’s higher education by 2025.
2. Short term ideology
Many investors take investment decisions with a time horizon of few months. Investments, particularly if you are buying equity stocks or equity funds need to be made with at least 5 years in mind. The longer the time frame, lesser will be volatility of returns, higher will be the returns. Hence, taking investment decisions with a long-term goal in mind is always recommended.
3. Getting influenced by open sources
Most of us read/watch the news daily and based on their recommendations we make our investments. Point to be taken here is given recommendations are not bad/wrong however one should asses their risk/investment trait against those recommendations and buy in-align with their long-term goal. Every investor has a unique capacity to take the risk. A risk profiling exercise is a must-do before starting to invest.
4. Investing without an asset allocation plan
An asset allocation plan defines the allocation of money between assets and is a base for wealth creation. No wealth creation is possible without asset allocation plan. As per studies conducted in the U.S., the long-term probability of success of a portfolio is 94% if the investor sticks to the asset allocation plan made. Asset allocation is an investment strategy that aims to balance risk and reward, the three main asset classes - equities, fixed-income, and cash and equivalents - have different levels of risk and return, so each will behave differently over time. One needs to allocate money into these assets according to their goal.
5. Excessively confident in past history
This is a typical human nature, extended to the domain of “Investing”. Like anything else in life, demonstrating excessively confident, just on the basis of past historical data or events is a sure-fire method to fail.
For example: if someone has observed that certain stocks had risen in the last 3 years, just the day after the union budget was presented, does that mean, that this year too, the same stocks are bound to raise the next day after the budget? Stocks can only rise if there is some positive news about it and not due to any other factor.
6. Copying others, looking for quick tips
This is the most universally practiced habit of investors. Every investor is different with different goals, investment styles, and investment needs. Copying somebody is a not a good practice to adopt in investments as what’s good for that person need not necessarily be good for you. It may, in fact, be unsuitable for you.
Example: If your friend regularly seems to trade in aggressive stocks and seems to be making money, do you think doing the same thing would be suitable for you? Are you prepared to take losses which can occur with this strategy?
7. Only Plans…NO ACTION!
Many investors are diligent and good at doing long-term planning, but they hesitate to execute the plan. At the end of the day, it is ACTION which counts as the journey to wealth creation starts by acting upon a long-term investment plan, which has all the key success elements like risk profiling, asset allocation and defining long-term goals and the plan to achieve each goal.
Investors who recognize and avoid these seven common mistakes give themselves a great advantage in meeting their investment goals.