8 Most Common investment mistakes that you should avoid while investing
Investment seems a facile endeavor; still, it’s not a cup of tea for everyone. People often plunge into this field without knowing much about the market and investments and thus, commit mistakes. These investment mistakes can cost you a chunk of money; hence, you should avoid these common investing mistakes to lead a wealthy as well as healthy life. Successful investment is not only just picking up the right long-term investment plan or any short-term investment plan, but also you should avoid silly mistakes that might undo all your previous hard work and efforts.
8 Common mistakes every investor makes in their life
- Lack of proper investment goals
- Getting confused between insurance and investment
- Consider asset allocation along with investment plans
- Try to maintain an adequate emergency fund
- Lack of patience
- Your emotions overpower you
- Failure to diversify
- Trying to time the market
1. Lack of proper investment goals
This is the most common mistake that makes your investment unsuccessful. You should articulate your needs and requirements and, thus, purchase the best investment plans to achieve those objectives successfully. Your investment goals could be anything like your children’s foreign education, marriage plan, home loan, foreign trip, retirement, and so on. Once you set your financial goal, you can visualize how much you need to fulfill these goals. Thus, you can create an optimum investment strategy based on your risk appetite, tenure time, and investment rate. For example, equities are inconsistent for a shorter period, but they outrun other assets for the longer term.
2. Getting confused between insurance and investment
Before investing in a single penny, you should be aware of the difference between insurance and investment. The prime objective of a life insurance policy is to offer coverage along with an alternative source of income to the family members of the policyholders in case of the sudden demise of the policyholders. So, you should always purchase life insurance that could be 10-15 times your per annum income. But very often, investors can’t discriminate between these two. As a result, they purchase policies like endowment policies, money-back policies, etc., and commit mistakes. Because these policies neither offer sufficient life cover nor provide good returns on investments due to low liquidity features. Thus, a term insurance policy could be the utmost choice for you that offers higher cover with a low premium.
3. Consider asset allocation along with investment plans
Many studies have claimed that asset allocation plays a quintessential role in making your investment portfolio successful. But instead of doing suitable asset allocation, most investors spend a chunk of time picking up the right investment plans. So, before choosing the best investment plan with high returns, you should take a look at your asset allocation.
4. Try to maintain an adequate emergency fund
Always try to preserve an adequate emergency fund to deal with unforeseen incidents. An emergency fund will help you to overcome financial emergencies and support you in managing unescapable expenses due to your loss of income because of sudden injury, illness, job loss, disability, etc. This fund should be sufficient to cater to all your monthly expenditures like EMIs, SIPs, house rent, children’s education, premiums, medical expenses, etc., for at least 6 months. If you don’t have this emergency fund, you either need to utilize/redeem your long-term investment policies or take loans at higher interests to fulfill the requirements. Thus, before making any investment, keep aside a certain amount to meet all these emergencies.
5. Lack of patience
To make your investment successful, you need patience (99%) along with investing action (1%). But most investors are impatient, and they used to fiddle with their investment portfolios. So, instead of focusing on short-term volatile plans, you should consider long-term growth plans for a successful investment because the market will fluctuate with each passing day. Thus, you should be focused enough and make proper investing decisions to thrive your wealth.
6. Your emotions overpower you
Emotion is the main reason for the failure of your investment as it kills your investment return. The maxim that fears and voracity control the market is true. While making investment decisions, investors should not be overpowered by either fear or greed. Always think about the bigger picture. You may not get good returns over a shorter time frame, but you will certainly get good results over the longer term. Very often, investors become greedy and even try to enhance their investments in bull market situations. While some get so scared that they redeem their long-term investments or may not be confident for further investments even when the market is up.
7. Failure to diversify
If you don’t know how to diversify your portfolio, you can’t make your investment successful. Diversification is quintessential to maintain balance in your risky assets with steady options. Thus, you can divide your amount in multifarious ways. Don’t invest in a particular asset like commodity or equity as it will uplift your risk. Even if you are a risk-friendly investor, don’t invest your entire amount in a single bucket. By including both short-term and long-term investments, build your portfolio. To distribute your risk exposure evenly, acquire both high-risk and low-risk investments.
8. Trying to time the market
Another prime reason for unsuccessful investment is trying to time the market. This is an arduous task to time the market. Even the most successful and deft investors often fail to do it. A popular study has claimed that about 94% of the portfolio’s returns are the results of correct asset allocation, not from the timing of the market.
How do you overcome these mistakes?
- Make a concrete plan: Identify your goals and how much money you can invest to fulfil those goals. If you are not confident enough in making a plan, take assistance from a professional and dexterous financial planner.
- Monitor your investments: Monitor your investments and check their performance yearly. Once your income grows, you may add more or can continue with the existing plans.
- Fun money: Sometimes, you want to spend the money to maintain your lifestyle. Allocate fun money (5% of your investment profile) that you can lose without stretching your financial condition.
Mistakes are parts of life, and the same goes for the investment portfolio. But if you know what they are, then you can avoid them while choosing the best investment plans for your future.
