“To Err is Human” you might have heard about this phrase many times & yes it is valid in Investing too!!
A Value Investor makes a lot of mistakes in his entire investment’s life and always tries to learn from those mistakes. Long term investors want to win in each of their investments; like any other person on earth they also make mistakes but they learn from them so as not to repeat them again.
Here I am listing 5 common mistakes which an investor makes in his investing life. You can significantly boost your chances of investment success by becoming aware of these typical errors and taking steps to avoid them.
1.) No Proper Planning: Planning plays a big role in investment but it should be properly aligned with your goals, risks appetite, benchmarking etc. Investing without proper planning is like sailing in the sea but dont know where to go.
Prepare your personal plan by considering the below factors:
a.) Goals – First of all figure out why do you want to invest. If you have any goals like child marriage, child education, buying home etc. then please make a note of all of them and then figure out how much money would you need to achieve those goals. Lets say after 10 years your child will be in college and as per today’s market scenario college fee will be Rs. 5,00,000 (its just an assumption) so, now we need to calculate how much money would be required after 10 years, as we all know inflation is at 10% in India (obviously the fee in education and health sector is increasing way faster than inflation but to keep calculation simple we will consider it to be 10% only). One can calculate the amount required after 10 years by putting required values in below calculator:
By putting the required fields in the calculator above, today’s Rs. 5,00,000 will become Rs. 12,96,871 after 10 years.
By calculating this for each of your goals, you are in a better position to assess how much money you would require for every goal of yours .
b.) Risks: If you are aware about your goals then you can easily figure out how much risk you must or can take to achieve the same.
c.) Appropriate Benchmarking: Most of people follow the most famous Index in their country for benchmarking but there is always difference between investors desire for return, requirement of return and actual return. Therefore you have to keep all in line so that you can achieve your goals.
d.) Asset allocation: As you are aware about your goals and how much risk you can take. It becomes easier to follow asset allocation. Like if you need high returns to achieve your goals then its obvious you need to invest more in the high risk assets like Equity. But if your goals require low return then you can also invest in Debt.
2.) Short Time horizon: Many people invest in the share market for very short period of time because they believe that this is the only way by which they can get better returns. Firstly this is not their fault; they see analysts or investors belonging to the news channel or magazine all talk about 1 day to 1 week investment time horizon. In following it they fall prey to huge losses. Secondly if some one is ready to go for a little longer period then he will see the time period ranging from 6 months to 1 year and expects his money to get doubled. I am not sure if they really know which asset can double (multiply to some Xs) their money in how many years??
“Be realistic, follow your goals and invest regularly in good companies for better return.”
3.) Following Financial Media: There is almost nothing on Financial News Shows that can help you achieve your goals. Turn them off. There are few newsletters that can provide you with anything of value. Even if there were.
Spend less time watching financial shows on TV. Spend more time creating – and sticking to – your investment plan.
4.) No Re-Balancing: Re-balancing is a process of returning your portfolio to its target asset allocation as outlined in your investment plan. Re-balancing is difficult because it forces you to sell the asset class that is performing well and buy more of your worst performing asset classes. This contrarily driven action is very difficult for many investors.
5.) Freaking out in market drop: Stock Market is completely unpredictable. Three centuries ago, when scientist Sir Isaac Newton lost a fortune in the “South Seas” stock collapse, he commented:
“I can calculate the movement of the stars, but not the madness of men.”
In 2008-09 recession most of the index’s lost half of its value in less than an year. Millions of investors saw billions of dollars in assets disappear. Just as Sir Isaac had done, many investors pulled out at the worst possible time—the bottom.
Yet five years from that 2009 market meltdown, the Dow was up roughly 10,000 points to a record 16,000-plus. Patient investors were the winners. Notes Glassman:
“Making money in the stock market is hard, not because finding great companies is difficult but because the best and easiest-to-understand strategy for winning is so difficult to adhere to. That strategy can be described in three words: buy and hold.”
Conclusion: Investors who recognize and avoid these five common mistakes, give themselves a great advantage in meeting their investment goals. Most of the solutions above are not exciting, and they don’t make great cocktail party conversation. However, they are likely to be profitable. And isn’t that why we really invest?
If you have something to add, Please post your thoughts in comments. I would love to hear from you.
Happy Investing!!
