Personal Finance: Common investment mistakes
While investment is necessary, not all people know the right way to do it. The idea behind parking money in various market instruments is to financially secure your future while saving enough for needs like higher education or health or retirement. But the road to successful investment is filled with errors. Here are some common ones:
Lack of clarity: Why have you chosen a particular financial instrument over another? Do you have investment goals? How much return would you like to earn after a specific period? Have you divided your financial goals into long-term, mid-term and short-term before deciding on your investments? These four questions about investment decisions are crucial.
Past performance: The past may have an impact on your future financial decisions, but it cannot become the sole consideration. People often check past returns to gauge particular stocks or funds, and while assessing the working of a financial instrument helps, any decision regarding its purchase must be rooted in the present context and in its future possibilities. A financial instrument’s returns depend on myriad factors including inflation and current economic conditions. Also, changes in management and business policies could cause the price of a particular stock to increase.
Exaggerated expectation: Timely and regular investments can get you handsome returns, but to expect becoming filthy rich within a year amount to extremely high expectation of earnings and profits. While you may be making your investments after considerable planning and research, be ready to face any adverse situation too or realize that not all stocks and investment options may yield you expected returns.
Not diversifying: Investment diversification is essential to risk management. Allocating investments in different channels or to different categories helps mitigate the risk associated with investments that may be volatile or subject to extreme market movements, but still are worthy enough to invest in. People refuse to look beyond debt funds and fixed money market instruments to earn fixed returns, and wile While this shields them from possible market losses, it does not give access to good returns needed to beat rising inflation.
No period reviews: A common and avoidable mistake that most people make is not reviewing their investment portfolio regularly. While you may have invested in myriad market instruments, your inability to check their performance regularly will keep you bereft of the necessary information needed to make your investment goals and decide the right balance of equity and debt funds in the long run.
Personal Finance is a weekly feature that aims to provide our readers pertinent and helpful financial information