5 common investing mistakes

Investment

oi-Sneha

By Perfios Money Manager

Updated: Tuesday, May 14, 2013, 9:29 [IST]

Investing is as much about knowing what not to do as knowing what to do. Often, just avoiding certain common mistakes can make one a better investor. Investing is more an art than a science and one need not be a genius to invest well. Below are five common mistakes which investors often make and some suggestions on how to counter these mistakes.

Investing only to save tax

This is by far the most common mistake people commit in the early years of their working life. The only objective of investing to most people at this stage is to avail the deduction of Rs 1 lac available under Section 80C of the Income Tax Act. While one should avail this deduction, there has to be a proper plan as to which instruments are the best to achieve this. Rather than making adhoc investments in insurance policies or mutual funds or tax saving fixed deposits, one needs to give a good thought to what investment options align with your future planning. And most definitely, this cannot be achieved if you scamper at the very end of the financial year to make your decisions. Your plan should be in place at the start of the financial year.

Another mistake is that once the tax planning is out of the way, people think they have done their bit for the year. You need to look beyond the realm of tax saving because that is just an incidental benefit to investing. The question you may ask yourself is, if there was no saving of tax, would you then spend all the money or still invest for the future?

Putting all eggs in one basket

This sure does sound like a cliché and yet this is another common mistake most people are guilty of committing. Especially off late, it is not uncommon to see only real estate dominating the investment portfolio or even gold until a while ago. Some investors swear by real assets, something that is tangible like property or gold. There are others who would not want to look beyond fixed deposits and post office schemes. And though lesser in number, there are people who go overboard with equity.

Now we do know that too much of anything is not good and there needs to be a balance. This is one principle that applies to every single aspect of life and also to investing. Different investment or asset classes behave differently from each other. By investing across different assets, one can cushion the impact of a fall in any particular asset class and bring down the overall risk to the portfolio. What kind of allocation you should have would depend upon your future goals and your risk taking ability. It is not a bad idea of seek professional help for this purpose.

Over diversifying

While putting all your eggs in one basket is one extreme, spreading investment too thinly across different investments is another extreme. Both would do more harm than good.

This mistake if often very distinct with some mutual funds investors who believe that more the number of funds they hold, lesser is the risk and better is the return. This is a myth. Holding 20 schemes is your portfolio is not going to help you in any way. If you have 5 large cap funds, you can almost be certain that all of them would be holding the same set of stocks and getting almost similar kind of returns. So why hassle yourself with 5 schemes when 1 or 2 would do just the same. Diversification could be across markets caps, investment styles, sectors and even regions. Hence a 5-6 schemes portfolio covering the aforementioned would work equally well and perhaps better. One does not only save costs, it improves agility and tracking becomes easier. Hence think twice before picking every 5-star fund that is there.

Getting emotions in the way of investment decisions

This is that one single mistake which can land you in trouble every single time you let it happen. And it is also the most difficult to keep a check on. With a glut of information in the market and real time news flow, it can be tricky to not let it affect you. If you constantly keep looking at your portfolio and the impact of various events on it, you are sure to drive yourself crazy. One must remember that everything that goes up must come down and vice versa. No situation can last forever. And we have history to prove it. Especially true of the equity markets which can be extremely volatile over short term prompting you to try and time it. But it is a futile exercise because it can only lead to more pain than gain.

It would help to understand how different investment classes behave and what can be expected of them. Have a medium to long term view on the portfolio, review periodically, cut out all the noise and focus on why you chose a particular investment in the first place.

Chasing high returns

Chasing high returns is often a folly. One may ask "how can high returns not be good?" The simple answer is that because they come at a high risk. You cannot throw around numbers saying I'll be happy with a 15% or 20% return without having a basis to it. For most people, they may not need returns anywhere close to the number mentioned above, they may need much lesser. And why? Because what return your portfolio should earn would depend on what you need to achieve in life. If I can achieve all my life's goals with 8% p.a. returns on my portfolio, do I need to take risk at all? For some it could be 9%, for other 10% and the like. So there is not point chasing high returns. It makes more sense to know what return you need to get on your portfolio to meet all life's goals. Again, it may be advisable to hire the services of a financial planner in order to get this right.

To conclude, a quote by legendary investor Warren Buffet says it all "You only have to do a very few things right in your life so long as you don't do too many things wrong."

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