Take a cue from the biggest investment mistakes

Arundhati Konar, YourMoneySite

They say life moves on, and so do stock markets. A stock market may reflect recession, or weak global cues, or high inflation, but what remains unchanged is the active six-hour trading session. The very idea of ‘easy money’ makes the concept of equity investments acceptable worldwide.

Higher the risk one takes higher is the return expected. Every decline is a buying opportunity, while every gain indicates more investments.

Such is the obsession of ‘easy money’ that one often tends to ignore small but extremely important measures before investing. The inquisitiveness or madness of investing in stock markets must have gone up, but the level of awareness has failed to improve. As a result, even before the investor could realise the kind of investment his money is into, he ends up losing a lifetime earning.

So what are the most common investment mistakes? Take a look:

Risk- Return Relationship: Poor understanding of risk-return relationship is of the commonest mistakes investors fall prey of. Archana Bhingarde, Certified Financial Planner, says, “there is a higher risk associated with the higher returns. Investing without understanding this relationship will lead to losses.” For example, after investing Rs 100 with a 12-month tenure, if the investor is expecting a profit of 30-40%, it will be considered unrealistic to attain that kind of return without risking or doubling the invested money.

In such a case, it is always advisable for the investor to opt of professional guidance. A professional has skills to understand and monitor investments. The professional will charge some fees, but will save the blunders that an uninformed investor may do with his money.

Hidden Risk: Debt investments carry a hidden risk of Inflation. Bhingarde explains, investment in Fixed deposit @ 9% will attract 30.9% Tax (for higher income bracket) will give a net return of 6.219. This will actually erode the wealth as it carries an inherent risk of not safeguarding wealth against inflation which is growing at much faster rate. Many investors who go for safe returns are ignorant of this hidden risk.

Lack of Diversification: A concentrated portfolio is one where an individual invests heavily into a particular asset class. Bhingarde says, “Too much concentration of wealth in debt will not allow the money to grow. Similarly, too much concentration of wealth in equity may leave you in financial crises in case of emergency.” In other words, investor should divide his risk over several securities instead of investing all money in one company. One may argue that doing so may limit one’s profit, but on a contrary view, it does limit the investor’s losses as well. Thus, it is wise to keep your money invested in different segments.

One way to have a diversified portfolio is to invest in mutual funds which cover a certain profile of stocks according to investor’s will.

Investing as per the market situations and tips: Time and again it’s observed that investors put in their money, following the market trend or on the basis of tips from friends, relatives or media. Bhingarde explains, “some investors choose the investments based on the top 10 ranking and past performance. They fail to understand that these rankings and returns keep on changing as per the economic situations, views of fund manager or change in fund manager etc. And the expectations which they have may not be fulfilled from the investments.” Therefore, it is essential for any individual to do a thorough research before investing on a stock. Remember hurry can make you worry.

Lack of Systematic Monitoring: Archana Bhingarde says it is crucial for every investor to review their investments regularly, failing to do so, one may lose on good opportunities and returns.

Avoiding Professional Guidance

Timing Market: This is other commonest mistakes investors. One needs to understand the difference between short-term and long-term investment. Many long term investors fail to differentiate between two and in order to time the market, pull out their money at peaks, buy back at the low level. By doing so, they not only risk short-term misfortune but also make a considerable compromise in their return over time.

Unclear Financial Goals: Often investors put in their money following the herd. In the process they ignore the concept of risk appetite, which varies from individual to individual. Bhingarde says, “to please a friend or relative who offers them some investment products, investors do not take investments seriously and do not try to link them with the financial object.” All said and done, by end of the day, an investor will always find a tradeoff between risk and reward, and no one gets the best of both worlds. Only the individual investing knows his appetite of risk, and above all that should be the thing which should not only determine what he invests in, but also how is the money invested.

Source: http://www.yourmoneysite.com/news/2012/jan/take-a-cue-from-the-biggest-investment-mistakes.html