The Three Mistakes of an Investor’s Life
NEARLY All Investors have at some point in their lives made investment decisions they have regretted later. This week, FinEdge brings you the three most common mistakes of an Investor’s life. We hope you find it useful!
Not understanding Risk & Reward
Before all else, it’s very important to understand that when it comes to investing, there are no free lunches! Here’s a thumb rule – for every percentage point of return that you are aiming for above the risk free rate (the yield on 10 year Government bonds), you must be prepared to bear at least twice that number as an interim downside. Let’s say you are aiming for a 12% return – that’s 4% more than the risk free rate of 8%. Do you have the capacity to tolerate a short term downside of twice that number (that is -8%), or will it give you sleepless nights and drive you to take rash decisions? If not, stick to lower risk instruments (and settle for a lower return!)
Not understanding how risk and reward go hand in hand is a surefire way to make long term losses on your hard earned money.
Buying on Euphoria, Selling on Fear
Your neighbor has made Rs. 2 Lacs in the stock market. Your brother has just sold his property at a profit of 10 Lacs. Your colleague’s mutual fund portfolio has returned 90% in the past year. These numbers are enough to generate a heady mix of regret and euphoria in your mind! Buying on euphoria is not a smart idea – one must be realistic and take rational, long term investment decisions based on sound logic and rational evaluation instead.
A mistake of comparable proportions is selling out or exiting based on fear. The media often sensationalizes market movements with words like “bloodbath” and “crash”. In reality, they are just creating a hype to boost their TRP’s! It’s a mistake to exit your investments, sell your real estate holdings or stop your SIP’s after prices have fallen, simply based on the fear that they might fall more. To borrow an anecdote from the great Warren Buffett – “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
Not doing your homework
Caveat Emptor is a popular Latin phrase meaning “Let the Buyer Beware”. While it’s good to have a trusted financial advisor whose advice you have complete confidence in, it’s equally important to confirm all relevant facts before you invest your hard earned money. It’s both your right and your duty to thoroughly check for investment risks, past returns, fees, inbuilt loads and charges. In today’s information age, it’s become extremely easy to check for facts and arrive at a rational decision. It’s better to do that in advance than to get saddled with a poor investment and regret it for years on end!