Life sure gives us a second chance for many things. But what about for investment mistakes we commit? Do we get a second chance to rectify them? Most often not, and so even a small mistake could probably result in a heavy financial loss. So what should you do and not do when it comes to your money matters and investments? Here are the 10 most common investment blunders people commit. By avoiding these mistakes, one could sure hope to boost the value on their portfolio.
- Investing Without a Financial Plan
One of the biggest blunders most people commit is investing without a well defined financial plan. A financial plan is necessary to ensure savings are effectively allocated to various assets to generate future income and thus satisfy life’s goals. Haphazard investing without a clear plan could result in inadequate or negative returns from the portfolio. Prioritize your needs and be clear of your goals. Make a financial plan on the basis of your risk profile, time horizon and family commitments. You could take the help of a professionally qualified Certified Financial Planner to guide you through. Remember investing is a long term and ongoing process, thus one must have a proper plan and a discipline to execute it.
- Lack of Clear Understanding of Risk
Very often, we end up buying investment products, simply because it offers higher returns, or because it has been recommended by a friend. While making investment decisions we must have a clear understanding of how much risk we are able to take, and, what exactly is the intrinsic risk of the product. The risk you may be able to take greatly depends on liquidity at hand, family commitments and age (whether nearing retirement or in the beginning of your career etc…) Remember every individual has varying risk profiles. What may be ideal for your friend may not exactly be suitable for you.
- Starting Late
The early bird catches the worm. So goes the age old proverb. The same is true when it comes to investments too. In the early earning years, when family commitments are lesser, you could actually save much more money. However, the common thought of most people is that saving could be done later. And “later” actually becomes too late. Start your financial planning early in life, and let the power of compounding work to make your money grow.
- Lack or Improper Diversification
Diversification of assets is vital to ensure there is minimal risk in one’s portfolio and to boost up returns. Most often people do not diversify and stick to single asset classes, or, they invest in too many of them. Your investment basket must comprise of the right asset classes based on your goals and risk profile, including a mix of both debt and equity. Also a regular monitoring of the portfolio is necessary and if required fine tune them a bit as per changes in market behavior or personal circumstances.
- Having Inadequate Life Insurance
The importance of having adequate life insurance can be stressed upon again and again. Life insurance is a necessity to ensure loved ones are entitled to a financially secure life in case of any unforeseen happening to the bread winner of the family. However most often people carry a very careless attitude towards this. A general thumb rule is that one should be covered up to 10 times his annual expense. Thus choose the right insurance policy to protect your family adequately.
- Last Minute Investments in Tax Saving Instruments
Come last week of March and the tax saving rush begins. Financial institutions too cash in on this rush by aggressively marketing their tax saving products. And the end result, of course you save up some tax, but you may also probably end up with a financial product which may not actually suit your need. What one must ideally do is to start tax planning from the beginning of the financial year to ensure you don’t invest for the sake of investing, as you don’t have time left at hand.
- Emotional Attachment to Investment
We all have favourite investments. However getting emotionally attached to it could have negative impact on your portfolio. If an investment is “non- performing”, then it is wise to weed them out when the opportunity strikes. Review on an occasional basis any investment not contributing returns and have them removed before they could cause any further damage.
- Investing with Borrowed Money
Making investments with money borrowed from banks, credit cards, or friends is a sure shot step to financial disaster. Initially though it may seem to be really attractive. But it is a risky option. In case of a market fall, or in case of non commitment of debt payments, there could be a complete wipe out of the money, leaving you with loans that need to be serviced at high interest rates.
- Making Investments Based on Word of Mouth or Market Rumors
Investments should be done solely on individual research. Of course taking cues from the market is required. However over dependence on them, without any self- research on the investment option, is not really a good thing to do.
- Timing the Market
Trying to time the market to earn a quick buck, may not always yield positive returns. Many a times with volatile market behaviors even experts fail to make accurate judgments. An ideal investment strategy should involve contributions that are regular, disciplined and systematic, thereby earning maximum returns in the long run.
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