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5 Rookie Mistakes Nearly Every Budding Investor Makes and How to Avoid Them

07 July 2022, 1:42 PM

Under the current perspective, with the stock market conditions reaching record heights, several people are now contemplating getting back into the domain of the market. Amidst such trends, most of the people are beginning to invest in various sorts of financial instruments with good prospects and a promise of fair returns in the future to secure the overall financial health and increase the wealth corpus in the long run. But in doing so, most of the investors invariably commit some of the investment mistakes which may hamper the financial health. Some such mistakes are discussed below:

Ambiguity in Understanding the Financial Investment Option

It is a blunder to invest in any financial instrument without clearly understanding its terms. Even the slightest doubt regarding any aspect of the investment tool must be clarified with the concerned authorities before settling for investment. It’s like participating in a gaming competition without knowing the rules. Under such circumstances, a loss is more or less ascertained.

If you choose to invest in the stock market but you fail to understand the relevant business models, it won’t serve your purpose. The most convenient option to avoid such a situation is to build a diversified portfolio of mutual funds or exchange-traded funds. 

Lacking patience

Having patience is one of the most significant aspects to win the game in the investment market. Slow and steady is the thumb rule here. A slow, steady and a disciplined approach will let you reap the optimum benefits of investments in the long run. You must have realistic expectations out of the investment options chosen and designing the financial goals in tandem with it will let you succeed in this respect. 

Excessive Investment Turnover

Too much investment turnover proves to be another return-killer in this investment market. Extreme change of funds will lead to excessive transaction costs which will eventually eat up the return value, leaving negligible return in the basket. Except for institutional investors, this tactic just never works in any other case. The institutions possess the benefit of comparatively lower commission rates.

Market Timing Attempt

Judging the current trend of the market is one of the chief considerable factors before investing. The future of the investment returns will be decided upon the current market trend. Improper market timing is again a very strong return killer. The basics of investment states to make investments when the market remains bearish, especially in the stock market. You will reap the benefits in the long run as the situation changes in the long run. Most of the returns of any investment portfolio can be explained by your decisions regarding security choice as well as asset allocation.

Failure in Diversification

The key concept of keeping yourself afloat in the market, in the long run, is not to “put all eggs in one basket”. This means that an investment portfolio should consist of investments towards as many financial tools as possible. Getting handsome returns from certain benchmark options may be plausible for professional investors, but it surely does not work that way with the general investors. The thumb rule in this respect is not to allocate over 5%-10% of the total investing assets towards any particular fund. Spread it across savings, FDs, insurances, mutual funds, stocks. Adjust the investment percentage depending on your financial targets and your risk appetite. 

How to Avoid Committing Such Mistakes While Investing?

Step 1: Develop a Plan of Action

Develop and follow a concrete, coherent and realistic plan of action. Clearly determine your investment horizon and financial targets and choose the investment instruments accordingly. If you cannot decide for yourself, seek the proper guidance of a professional financial advisor but do not let your resources go haywire because of the lack of efficient and effective planning.

Step 2: Monitor the Income and Expenditure Ratio

Careful and regular monitoring of the income and expenses will keep a check towards the tendency of reckless expenditure. This disciplined habit will be of great help in the long run. It is best to choose a predetermined limit of investment and consistently stick to that financial planning for obtaining maximum benefits.

Step 3: Possessing Market Knowledge

While choosing an investment option, it is best to know the basic details of that particular scheme. Possessing minimum knowledge of the chosen scheme is one of the basic requirements that an investor is expected to possess. You don’t need to be an Subject Matter Expert in that field, but marginal outline knowledge is essential.

Mistakes are a part of an investor’s journey. Some certain mistakes will show you the right way. But make sure that the stakes are never too high. But sticking to a disciplined approach will surely guide you efficiently. It is best to inculcate the habit of investing as early as possible. The earlier the investments made, the better benefits it will reap in the long run.