The 5 Step Guide to Avoid Making Investment Mistakes
This 5-step plan will help you minimise the impact of investment mistakes on your portfolio
"The only man who never makes a mistake is the man who never does anything."
If you apply this famous quote by Theodore Roosevelt to investing, the easiest way to avoid mistakes while investing is by not investing at all. But, that is the biggest investment mistake one can make.
Investing is important to build wealth in the long term. However, just investing is not enough as investing right is equally important.
It is easy to commit mistakes that can affect your ability to build wealth in the long term. To ensure that you don't make such investment mistakes, we give you a 5-step plan to help you out.
Step 1: Stop Procrastinating
One common mistake that people make is that they wait to start investing. If the stock markets are rising, they will wait for a correction. If the stock markets are falling, they will wait for them to fall further. Of course, there's no end to such procrastination. And the more you delay investing, the more you delay your chances of creating wealth.
What to do: Consider aligning your investments to your goals. Let's say your goal is to build a retirement corpus, which has a time horizon of 30 years. In this case, the ups and downs of the markets shouldn't bother you so much. So, start investing as soon as you can and continue investing until you meet your goals.
Related Read: Importance of Goal-Based Investing
Step 2: Stop Chasing Recent Returns
Once investors start investing, the mistake they make is picking investments that have given great returns in the recent past. They will invest in a mutual fund or stock that is in the news for its recent outperformance and chase it expecting the same. But we all know where that will take them eventually.
What to do: Look at how a stock or mutual fund has performed in different market conditions. Most investments will do well when the markets are rising, but the great ones will outshine even in turbulent times. These are the types of investments that you need, because protecting wealth is as important as building it.
Step 3: Stop Putting all Eggs in One Basket
Here, eggs are investments like stocks or mutual funds of the same type and basket is the investor's portfolio. It's a mistake to hold too many investments of the same kind. They don't add any real value to an investor's portfolio and give the illusion of diversification, which is obviously not a good thing.
Related Read: This is How you Can Diversify Your Investment Portfolio
What to do: Diversify. Invest in different types of instruments. You can invest across asset classes (equities, bonds, real estate), across market cap (large-cap, mid-cap, small-cap), across styles (growth, value, passive) and across sectors and industries (FMCG, pharma, technology). Not all investments do well at the same time, which is why it's important to diversify.
Step 4: Stop Analyzing too Much
It is not easy to not look at your investments every day. It's tempting to see how one's investments are doing. But of course, over analysis is not really helpful. Investors end up taking decisions based on short-term fluctuations instead of their long-term goals.
What to do: Check how your investment portfolio is doing on a regular basis, but not too regularly. For most long-term investors, checking once or twice a year would suffice. Check how the portfolio is doing every six months or annually and take buy, sell or rebalance calls accordingly.
Step 5: Stop Being Overly Emotional
It has often been said that humans are emotional fools. All said and done, investors have also been known to take emotional decisions. Emotions like fear and greed often lead to decisions that do the investment portfolio more harm than good. Fear can make an investor stop investing. Greed can make the investor redeem instead of holding on. And so on.
Related Read: How Emotions Can Harm Investments
What to do: Leave emotions aside when it comes to taking investment decisions. Focus on your investment goals and objectives. If your goals are far away, continue investing irrespective of how the markets are doing. Similarly, don't redeem in haste; hold onto your investments for better returns. In a nutshell, let logic prevail over emotions.
These mistakes may seem to be too obvious, but a lot of investors end up making them. Make sure you don't and stay on track to achieving your long-term investments.