Top 5 mistakes investors make while investing

Mistakes while investing can ruin your financial life and leave you crippled for quite some time.

“Take chances, make mistakes. That’s how you grow.”

Mary Tyler Moore

Mistakes are an integral part of everyone’s life. It helps us to grow. However, it is always better to learn from other’s mistakes and avoid it whenever possible. Mistakes can be sometimes very costly and mistakes in investing can be an expensive affair. It can damage your finances and take you years to recover.

Here are some of the mistakes that people make while investing which you can easily avoid. Here are five of them:

Not having an emergency fund:

While starting to invest as early as possible may be a good and wise decision, it should be done only after you have your essentials in place. An emergency fund is one of such essentials. Investing is generally towards a particular goal and hence it won’t be right to withdraw funds from our investment account during an emergency. It will delay your goals by few months or even years. Hence, setting up an emergency fund is important before you start investing. Typically, you need to save three to six months of expenses in your emergency fund. A separate savings account is a good way to set up an emergency fund. Emergencies include job loss, accidents etc.

Savings vs Liquid Fund: Which one is the best for you?

Trying to do everything yourself:

Everyone can’t be expert at everything. Don’t we call the plumber to fix our bathroom or go to a hair dresser to get our hair cut? We do that because they are experts in their fields of expertise. We know that our bathroom and hair is safe in their hands. But many of us want to start investing on our own and become a DIY investor. It is not easy. While it may be easy when the markets are going on an uptrend, a severe downward movement in the market will jolt even disciplined investors. Hence, having a financial advisor or an expert is important. He or she will overlook all your investment needs and queries, and make you reach your financial goal at the minimum time frame by keeping you updated with the health of your portfolio.

Not diversifying enough or diversifying too much:

Opinions around diversification is diverse. While some advocate it, few are against it. It is better to be adequately diversified as it helps to reduce the risks associated with your portfolio. It is because different assets react to the same news in different ways.  The extent of diversification depends on various factors such as age, risk profile, dependents etc. Many investors have burned their fingers especially in direct stocks by investing all their savings in a particular stock. Another mistake that investors tend to do is over diversifying their portfolio. It should be taken into account that every instrument comes with management and other fees. Hence, by investing in similar products e.g. 4 large cap funds does not benefit your portfolio and will only pull down the overall returns of your portfolio. Technically, you will be paying separate management fees to the fund house and manager to manage the same stocks. 

Diversification: The Why’s and How’s

Investing without goals:

Many investors are guilty of not investing with a goal in mind. Investing without a goal is just like a ship without a destination. Just like a ship without a destination will sway according to the forces and direction of the water waves. Investing without a goal is no different. Having a goal gives purpose which helps us to focus on the goal and ignore the noise around us. Investment is more about behaviour and less technical knowledge. Staying invested for the long term requires a strong ‘why’ and financial goals provide you with that. This makes our investing journey much easier.     

Following the herd:

The herd mentality in the investment world is a real thing and we do the mistake of investing in a product or a stock that gave handsome returns to our friends and colleagues. We fail to understand the different underlying factors such as risk tolerance and investment horizon. E.g. if you can’t take risk, equities may not be the right investment option for you and fixed deposits may be your ideal saving option. By following the herd, we end up losing our money. Hence, it is important to not to follow the herd and take investment decision after considering your investment horizon, goals and risk tolerance.

These were the top 5 mistakes that people make when investing and steer clear of these mistakes if you want to achieve your financial goals, make money work for you and have financial freedom.

Tags: investing, mistakes