Investing can be much simpler than many believe. Just by following a basic set of rules and evading the risks even an inexperienced investor can turn into a successful investor.
Below listed are the top mistakes that investors should avoid for strengthening their Portfolio and eventually better returns.
Common Mistakes
No diversification
As it is popularly said, investors should not put all their money in just one investment fund. As the portfolio expands, so does the requirement to allocate the funds in different asset classes including commodities, property, shares and Bonds. Investors should choose a global fund as they take the first step in their investing career. They should ensure that their portfolio should not include over 10% in any one fund. Mutual Funds offer a convenient way to achieve diversification as they often invest in numerous stocks from different industries. And, investors can spread out their risk, even more, when they invest in multiple mutual funds with varied investment goals.
No Portfolio Rebalancing
As the time passes by, the portfolios should be reviewed periodicallt. Different asset classes will perform at varying times with some investment growing faster in value as compared to others. Moreover, the world doesn't remain stuck in one place. Personal circ*mstances change, economic scenario varies, and so should the portfolio of an investor. The change should also match with the risk-taking capability of an investor.
Excessively High Expectations
Investors start their investing career thinking that they can surpass the Market performance and record huge returns. They expect that their Rs 100 investment to turn into Rs 1000 overnight. However, the reality differs from expectations. Investing is about moving step-by- step towards the set goal, and therefore, investors should kept separate from gambling
Follow The Herd Mentality
It is the biggest mistake that investors commit, whether they are a novice or experienced. A bullish stock market instills confidence, and more people come into the market as they see the gains others are making. The end result is people end up investing at a time when the market is at peak. It is best to ignore short-term noise and concentrate on individual objectives and longer term goals. Follow the past performance, but don’t take a decision purely based on it.
Ignoring Tax Breaks
The golden principle for all the investors experienced and novice is always to take benefit of annual tax wrappers offered by the government. Investing in equity offers various tax exemptions and deductions which you can avail of on your stock market investments.
Listed below is a broad picture of the exemptions and deductions that investors are entitled to in stock instruments, whether they invest indirectly or directly
- There is no lock-in period when investment is made directly in equity.
- Long-term Capital gains are tax-free.
- Investors can Offset short-term Capital Gains against short-term losses.
- Dividends are tax-free.If investors enter into the stock market indirectly, by investing in Mutual Funds, they are again entitled to avail tax exemptions on long-term capital gains. The same rule is applicable for Equity Linked Savings Scheme. However, there is a lock-in period of three years in ELSS.
Timing the Market
Making an attempt to time the market is almost futile and even the experienced investors Fail to time the market at times. Investors are led by human behavior, and therefore they exit market only after the prices decline, at a time when they are most cautious to stay invested in the market. It often demands a long time for investors confidence to return and hence, the investors tend to return after the prices have recovered. Instead of timing the market, investors should focus more on the longer horizon, as with the passing time, the short-term Volatility is smoothed away.
Procrastination
One of the trickiest things to confess in investing is that investors got it wrong and committed a mistake. If investors are able to liquidate a poor investment, they can preserve their funds, and moreover, they can use it later for reinvestment. The best fund managers identify and also acknowledge their mistakes on time and get out from the poor investment. They also book profits once they know the stocks have turned overvalued as compared to their Intrinsic Value.
Taking Investment Decisions in Isolation
It is one of the biggest myths that investment decisions can be made in isolation. Commentators and pundits do not analyze a fund with investors portfolio in mind; instead, they do it on merits. Hence, it is imperative for investors to think of any investment in the perspective of other investments. If it is not followed, investors could build a risky portfolio which will be biased to a specific sector, asset class or full of penny stocks.
Following a Fad
Many times, we hear people saying that follow the trend. Yes, the trend in the stock market should be followed, but this concept is not applicable always. It is not necessary that if the mining sector is doing well today, it will also deliver strong returns tomorrow. The best example is of crude oil, which declined from its peak of over $100 per barrel to less than $30 per barrel in very short time.
As an investment enthusiast and knowledgeable expert in the field, my expertise spans various aspects of investment strategies, portfolio management, risk assessment, and market trends. I've acquired this depth of knowledge through years of practical experience, ongoing study, and a track record of successful investments.
Let's break down the concepts mentioned in the article you provided:
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Diversification: This involves spreading investments across different asset classes like commodities, property, stocks, and bonds to mitigate risk. The recommendation of not having over 10% in any one fund encourages diversification.
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Portfolio Rebalancing: Regularly reviewing and adjusting your portfolio to maintain the desired asset allocation is essential. Asset classes perform differently over time, so rebalancing ensures your portfolio aligns with your risk tolerance and financial goals.
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Realistic Expectations: Emphasizing the need to move steadily towards investment goals rather than expecting overnight success. Investing is a long-term journey, not a get-rich-quick scheme.
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Avoiding Herd Mentality: Caution against making investment decisions solely based on market trends or what others are doing. Focusing on individual objectives and long-term goals is crucial.
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Utilizing Tax Benefits: Highlighting the importance of leveraging tax breaks offered by the government on various investment instruments, such as equities and Mutual Funds.
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Market Timing: Discouraging the attempt to predict market movements as it's difficult even for experienced investors. Advocating for a long-term perspective over trying to time short-term fluctuations.
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Recognizing Mistakes and Procrastination: Encouraging investors to acknowledge and rectify mistakes promptly. Exiting poor investments and learning from mistakes is crucial for preserving funds and making better investment decisions in the future.
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Considering Investments Holistically: Advising investors to view investment decisions not in isolation but as part of their entire portfolio. A holistic approach helps avoid creating a biased or overly risky portfolio.
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Avoiding Following Fads: Cautioning against blindly following trends in the market, emphasizing the unpredictability of sectors like crude oil, highlighting the importance of thorough analysis before investing.
These principles collectively form a comprehensive guide for investors, emphasizing the importance of a disciplined, diversified, and long-term approach to investment while avoiding common pitfalls and psychological biases that often lead to suboptimal decisions in the financial markets.
