3 Things to avoid in investing
Having had conversations with at least a few hundred investors on their investments, goals they invest for and what money means to them can say that most investors make some common mistakes. Have listed 3 most important things to avoid in investing.
1.Delaying planning & investing: It will probably take just one day to sit and compile all your investments across FD, Mutual Funds, Govt Savings schemes, PF balance etc to find out what exactly are you worth as the answer to most financial questions is do i have enough !
Do i have enough to retire?
Do i have enough to give good education to my children?
Can i run the family for 6 months to a year if i loose my job or meet with an accident
Yet, we delay this important point of planning saying who has the time etc. while spending hours every day discussing endlessly about politics,cricket and movies ! Take a day off if need be and get this going. Recent setbacks faced by employees of Jet Airways tells us this very clearly. https://timesofindia.indiatimes.com/business/india-business/jet-airways-pilots-appeal-to-sbi-for-funds-ask-pm-modi-to-save-20000-jobs/articleshow/68886187.cms
Once you have the details in place, start investing in all earnest. 30% of income is a good place to reach. After all, if we are paying 30% taxes to govt, shouldn’t we pay ourselves 30% too for our future?
We all seem to have starting trouble..Have met dozens of people who want to start planning and investing, we have a hour long conversations about goals and current investments etc., they promise to get back soon but the “soon” never happens. Again take a few hours off if need to be set up the investments.
2. Invest randomly : Ask about their favorite sport, gadget or car and you can see peoples eyes light up while they talk about nano level detail but ask about where they have invested, they reply, i don’t know, my banker asked me to invest in ABC High Return Fund with guaranteed high returns so i invested 10 Lacs! On checking it will turn out that ABC High return is not a Mutual Fund but an insurance scheme that can at best give 5% returns that too after 15 year lock in. Instead if we check with couple of of sources, compare returns, take time to understand, most mistakes can be avoided, but no, we decide hurriedly and regret in leisure.
A thumb rule to avoid this mistake : Any investment that is new, has a closing date, and is hurriedly sold is most likely not in your best interest.
3. Expect linear and regular returns in equity funds : Have you wondered why equity mutual funds give high returns ? You may answer because they invest in stocks and stocks give good returns in long run but why do stocks give good returns in long run? It is because by nature they are volatile, people pile upon stocks on the way up and sell them on the way down, this makes as sense as buying a car as its prices keep increasing but start selling minutes after its prices go down, We would in fact buy on the way down and avoid buying at high prices but we do do opposite with stocks and hence they are volatile, this is what gives the high returns. If we understand this and seldom sell equity but keep buying them then results though not guaranteed are likely to be very satisfactory.
I said three mistakes but there is a fourth one of not having proper asset allocation. Investing is never EITHER / OR it is AND. You can have FDs or bonds for safety AND Equity for high returns. Do not expect FD to give high returns ( remember it is for safety and not returns ) or equity to give regular annual returns safely ! a 7.5% 5 year FD will give 7.5% every year,
An equity fund on the other hand would give you something like this
Year 1 : -24% (ouch!)
Year 2 : +26%
Year 3 : +10%
Year 4 : +41%
Year 5 : -2%
Year 6 : +32%
Year 7 : -1%
Apprx returns of the above equity fund is 15% but depending on when you invested you might have seen either great returns of 40% or a loss of 24%. Even if you stayed invested from Year 1 to 3, you might have just about got small returns after 3 years. Most investors sell in 2-3 years but those who stay longer experience better returns.
Avoid these mistakes for a peaceful and prosperous future..