Know the mistakes generally committed by the investors and then try to avoid committing them.
In life, everyone makes mistakes. And it is extremely evident and specifically true when it comes to investment decisions, as there is always an element of uncertainty involved. With all of the historical data and experience we possess, there is still no computer program or individual that will get investment decisions ‘spot on’ all the time and after every bull run and a bear market we are all the more wiser. Herein, we would like to highlight some common mistakes made by investors and we are sure as we go by, we will learn from some newer mistakes in future.
Being impatient and emotional: PATIENCE! PATIENCE! And more PATIENCE! This is the key to investing. And along with patience, a lot of control on emotions. The one who masters this is the one who makes money.
Being impatient and emotional: PATIENCE! PATIENCE! And more PATIENCE! This is the key to investing. And along with patience, a lot of control on emotions. The one who masters this is the one who makes money.
Debt for the long-term and equity for the short-term: Investors are comfortable in PPF (15 years); tax-free bonds (10-15 years); fixed deposits (5 years). But the moment we talk of investment in equity, the investor’s time horizon is one month to a year and the moment the price drops, panic sets in. Actually, in reality it should be the other way around - long term investments should go into equities and short term investments into debt.
Selling winners and holding losers: No one likes to make a loss but sometimes it makes sense to book a loss rather than continue with the decision. It is not possible to make profits in equity all the time. The key to investment is to have more winners than losers. However, a majority of the time investors hold on to losers and sell winners. A classic case is that of Kingfisher Airlines. The stock price was at a high of Rs 73 in 2009 and last traded closer to Re. 1 in June 2015. There would be umpteen investors holding this stock hoping that it will reach their purchase price.
Buying equity on herd mentality: A majority of investors buy equities just because a friend recommends it or based on a media report. Many would not even be aware of what the company does. We do not understand anything about mobiles, clothes, cars, etc. However, we always do some research before buying. In fact, even for a simple bank deposit or company fixed deposit, we check what the interest rates are offered on a number of similar products and then invest. However, in the case of equity, we just follow blindly what a friend or the media states.
Ignoring inflation and taxation: These two go hand in hand and are the most important factors which we need to consider in any investment. Firstly, our focus should be on the post–tax returns. It is extremely relevant for investors who are in the highest tax slab. Secondly, the focus should be on to earn Real Returns [Actual Return (post-tax) less Inflation]. For example, if you invest in a bank fixed deposit which returns 9% and assuming inflation is 8%, your real return could vary from -1.7% to 0.1%, depending on the tax-bracket you fall under.
Bottom Line: Investing mistakes are a part and parcel of the investment process. Knowing what they are, when you're committing them and how to avoid them should help you to succeed as an investor. To avoid committing them, develop a well-thought out, systematic plan and stick to it.
Selling winners and holding losers: No one likes to make a loss but sometimes it makes sense to book a loss rather than continue with the decision. It is not possible to make profits in equity all the time. The key to investment is to have more winners than losers. However, a majority of the time investors hold on to losers and sell winners. A classic case is that of Kingfisher Airlines. The stock price was at a high of Rs 73 in 2009 and last traded closer to Re. 1 in June 2015. There would be umpteen investors holding this stock hoping that it will reach their purchase price.
Buying equity on herd mentality: A majority of investors buy equities just because a friend recommends it or based on a media report. Many would not even be aware of what the company does. We do not understand anything about mobiles, clothes, cars, etc. However, we always do some research before buying. In fact, even for a simple bank deposit or company fixed deposit, we check what the interest rates are offered on a number of similar products and then invest. However, in the case of equity, we just follow blindly what a friend or the media states.
Ignoring inflation and taxation: These two go hand in hand and are the most important factors which we need to consider in any investment. Firstly, our focus should be on the post–tax returns. It is extremely relevant for investors who are in the highest tax slab. Secondly, the focus should be on to earn Real Returns [Actual Return (post-tax) less Inflation]. For example, if you invest in a bank fixed deposit which returns 9% and assuming inflation is 8%, your real return could vary from -1.7% to 0.1%, depending on the tax-bracket you fall under.
Bottom Line: Investing mistakes are a part and parcel of the investment process. Knowing what they are, when you're committing them and how to avoid them should help you to succeed as an investor. To avoid committing them, develop a well-thought out, systematic plan and stick to it.
