Investment is the postponement of consumption. We invest our money with the expectation that it will grow with time. Since money loses value over time due to inflation, it must generate returns higher than inflation to protect its value. Investors make several mistakes in their investments that hamper the objective of their wealth creation. For instance, investors are overweight in one particular asset or don’t diversify their equity portfolio across the sector. Here we are delineating seven major investment mistakes frequently committed by investors.
Money lying idle in bank accounts
It is a well-known fact that no interest is paid in the current account, and savings bank accounts offer as little as 4% interest. The money lying idle in a bank account loses the opportunity to grow. So, if you want to see your money grow, invest it in some good profit-making schemes based on your financial goals. You can at least park your money in liquid funds or short-term fixed deposits, even if you do not want to invest for the long term.
Overspending on credit cards
It is very easy to overspend on credit cards, which is a bad practice. Make sure that you buy only what you need. Do not use credit cards, if you cannot pay the bill on or before the due date. Remember, rolling credit attracts a high interest rate.
Foreclosing SIPs
Buy low and sell high is the key to making a profit, but you cannot always time the market. Hence, SIP is the best way of investing in mutual funds, especially equity-oriented. The whole idea of investing through SIP is that your cost will average out in the long term. It is commonly seen that people cancel their SIP when markets underperform temporarily, which is otherwise the best time to invest. Investing more units of mutual funds through SIP when markets underperform results in huge profits when the markets reach new heights.
Trading based on tips
Equity markets are the best place for investment, but you need access to research and patience to earn a profit from your investment. Over 5000 stocks are listed on the BSE, but not all stocks are worth investing. Traders who trade by following the tips given by their friends and colleagues lose the most. Invest in the equity market with the help of a professional for your long-term financial goals. Do not invest in the equity market based on short-term trends.
Excessive use of Margins
Margin means using borrowed money to purchase securities. Margin indeed helps you to make more money, but in case the market falls, your loss exceeds manifold and sometimes even beyond your imagination. New investors always make the mistake of considering this Margin as free money, and this is where they make the biggest mistake. Margin is not free money. If we invest the margin money in any stock and the stock does not perform according to our planning and expectations, we end up with way too much loss without any gain. Ask yourself whether you would like to use your credit card to buy stocks? I know your answer is ‘No’. Using Margin is similar to using your credit card for buying stocks. Refrain from doing so.
Buying stocks that appear cheap
It is a common mistake to buy cheap stocks. Traders often compare the current share value of any company with its 52 week’s highest value. They consider buying cheap stocks as a good buy. For them, buying the shares of a company that was priced 40% higher last year is a good bet, but they forget that the higher prices of the shares last year are not going to give any benefit to them this year. Instead of buying the shares restlessly, it is better to investigate the reasons why the share prices of the same company have fallen so low. It is advised that the traders should always keep a critical eye on the fallen value of any stock, as it may hint at any foul play in the market.
Favor for any specific company
It is natural for us to love any company that always gives us good returns. We try to invest again and again in the same company to reap maximum benefits. But sometimes, we forget that we have bought the shares of the company for investment purposes, and the only aim of buying these stocks is to make a profit and nothing else. So, if at any time, you feel that the stocks of that company are not performing well, you should instantly stop investing in the same company. At the same time, you should look for any other company that is performing better. Favoritism in investment is risky for any trader.
It is very common to err while making investments. But learning from those mistakes, and identifying when you are repeating those mistakes and how you can refrain from them, is the key to successful investment. To refrain from mistakes, you have to make an intellectual and systematic program. Whatever you do with your money is up to you, but keeping these advises in mind will definitely help you create wealth over a period of time.