Investing doesn’t inevitably mean buying the next hot stock or trying to get the maximum amount of returns. Investment is engaging in the long-term game with the proper approach. Here are 7 of the most common investment mistakes new investors make. Avoiding these can catapult your investment journey to a whole new level.
Top 7 investment mistakes to avoid
Investing without realistic expectations or having a plan
Long-term Investing involves creating a well-diversified portfolio and waiting patiently for it to provide good returns. This process involves having realistic expectations and not expecting too much. To gain some additional returns, you can easily increase the risk factor which might not be suitable for you.
Secondarily, having a clear investment goal is equally important for successful investing. You should establish a definitive goal as well as tenure for your investments. Without these, you won’t be able to implement the appropriate strategy for your investments. Many investors confuse short-term trades with long-term investments and end up losing money in the long run.
Not Diversifying enough
The only way to defend yourself from short-term market volatility is to be diversified in various assets. In this way, you are not only protected from any sharp downside risk but you also create protection for your capital. Taking concentrated exposure in a particular asset class may increase the chances of returns but at the same time increases the downside risk as well. As the famous saying goes, “You should never put all your eggs in a single basket.”It is always advised to gain exposure in multiple asset classes (for example, Equity, Bonds, Fixed Deposits, Commodities, Gold, etc) so that you get the right balance of returns and risks.
Taking too little or too much risk
Investments always involve bearing a calculated risk in exchange for your desired returns. Taking too much risk can cause too much volatility which might be out of your comfort zone. Similarly taking too little risk or investing in only safe assets can result in too low returns which might not fulfill your financial goals. Therefore, it is important to know your risk profile and take the right amount of risk so that you can maintain your emotions that can lead you to take the wrong decisions at the wrong time.
Not doing due diligence or working with the wrong adviser
Investing is not taking investment advice from friends and family. You should either do proper research before making an investment or hire a professional who would do the job for you. Never depend on anyone blindly. There are many online databases where you can evaluate the past performance of any fund manager and then decide which one to chose. No matter which investment adviser you choose, make sure you are on the same page with them. An ideal professional should not only have the financial knowledge but also should have the ability to share the same philosophy as yours.
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Not reviewing your investments regularly
Long-term investments don’t always mean purchasing something and forgetting it for a later date. If you are well diversified then, there can be a high chance that some of your investments might not be not performing well. In order to rectify such irregularities in your portfolio, it is necessary to review it periodically. It is equally necessary to re-balance your portfolio at least once a year so that the proportion of debt and equity remains favorable.
Trying to time the market and trading too much
Another major investment mistake that investors make is trying to time the market. Trying to predict the top and bottom of a market is possible but very very hard. You will require a tremendous amount of skills and knowledge to do so. A study showed that investors who were not invested in the market on the 10 best days of the S&P 500 would obtain an annualized return of 5.4% against 9.2% if they were invested during those days. This shows that staying invested is the best option for investors rather than trying to time the market. Another way to restrict your long-term returns is to trade too frequently. If you are trying to make regular adjustments to your portfolio or trying to extract quick profits. There is a higher chance that you will ruin your aggregate returns by paying a chunk in trading and commission fees. You can also be taking in increased risks which might be unfavorable for your investment strategy.
Paying too many commissions and fees and forgetting about inflation
Time and again investors don’t consider the small advisory or trading fees to be significant. But over the long term, these minuscule charges compound into a significant part of your returns. Investing in a high-cost fund or paying an exorbitant advisory fee is a common mistake that investors make. So before investing in any fund or opening an account, make sure to check for all the fees and charges. Also, compare some other platforms and advisers to find the one with the best value proposition.
Although saving fees and commissions is a critical part, investors tend to focus on the relative returns and forget about inflation. The ideal method of calculating the real returns is to take the inflation-adjusted returns. This will inculcate an investment discipline where you will be capable to judge the actual returns and not only the nominal returns.
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Investing is an art and not science, therefore nobody can correctly predict what will happen in the next decades to follow. It is also ok to make some investment mistakes in the initial days. But to learn from your mistakes and develop a concrete plan to grow your wealth is the key. To ensure the protection of your capital, it is important to do due diligence as well. Spread the risk across various asset classes. If you manage to prevent the above-mentioned mistakes, you will be set to receive good returns over the long term.