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Investors should be beware of five investment myths

Written by: Shoaib Zaman
Published: Thursday, September 1, 2011, 12:43 [IST]
 
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Investors should be beware of five investment myths

There are some investment myths that we should not fall for ever and yet we keep listening it all the time. Here are some of the common one's that you should never believe in.

1. FDs is the best investment option
This notion is wrong. Though, Fixed Deposit (FD) does give a guaranteed return, but there is no guarantee that it will beat the rate of inflation in the country. And historically it does not perform above the level of inflation. Therefore, the actual value of money declines when it matures.

2. Stock markets is a quick way to make money
This is perhaps one assumption or impression which has resulted maximum losses for people.

Stock market is irrational. Who would have guessed in January 2008, the stock market would fall by more than 40%? Also who could have guessed that during May 2009 the stock market would have gained more than 28.1%. This means timing the market is not easy.

If you can't time it accurately then how will you make the quick money. This is the most simple thing to understand but yet so many people make the mistake of assuming the other way round.

3. Misunderstanding of diversification
The idea of diversification is to reduce the volatility and the uncertainty of risks. Let us explain this point through examples.

Too many stocks or funds in the portfolio will reduce the overall effectiveness of the stocks. Suppose you have an investment amount of Rs 1,000 in an auto company and then in order to diversify invest in a Pharmaceutical company. That would be Rs 500 each.

Now suppose in order diversify you instead of limiting it to two stocks considering the small sum of Rs 1,000. But then just for the same of diversification you would invest in 5 stocks, that will result in two problems.

First, in order to diversify and finding cheap stocks the quality of stocks can be compromised. And second the portfolio holding will be too spread therefore profit in one stock will not help the portfolio as much. So diversification of a portfolio should be considered under the light of risk appetite.

4. Investing because everyone else is doing it
This is perhaps another huge error that investors make, and perhaps a big reason why investors lose money while investing. But what happens is that when a bubble bursts, like the tech bubble did at the end of the 1990s, or the real estate bubble stock bubble in 2008, investors learn the hard way not to invest just because everyone else is doing it.

Many stock managed to recover majority of their fall in 2008 except for the stocks of real estate companies. In 2008 DLF was listed at Rs 800 a share, and then never recoverd anywhere near it. Its high since 2009 has been at Rs 454 and in 2011, the stock has only reached a high of Rs 291 a share on January 3, 2011. The learning should be that do your homework rather than following the herd.

5. Investment means 'Saving tax'
This is another wrong notion. The reason to invest is to increase wealth, while saving taxes is about saving taxes, i.e. giving less money to the government. But these two are two different activities and should not be mixed with each other.

If you are an investor who will not fall for these five simple financial myth then you will definitely be able to increase your wealth.

If you would also like to contribute or ask us a question, then e-mail to money (at) oneindia (dot) co (dot) in. You can contact the writer at md (dot) shoaib (at) oneindia (dot) co (dot) in

GoodReturns.in DISCLAIMER: The views expressed in this article are the views of the author and do not reflect the views of our company. GoodReturns.in does not take any responsibility for any losses incurred by investors who take their cues from the above article

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