Article

Top 7 Common Investing Mistakes and How to Avoid Them?

07 Aug 2019

Buying or investing in equities is not just about doing the right thing but a lot more about not doing the wrong things. Quite often, we tend to be conditioned by some ingrained practices from the past and that in turn impacts our investment decisions. This leads to investment mistakes along the way. Let us look at 7 such investing mistakes that investors need to avoid.

1. Letting the heart rule over the head

How often have you fallen in love with your stock portfolio? Quite often, investors refuse to accept that the fortune of the stock or the sector have structurally shifted. More so, in case of large blue chip stocks or stocks belonging to reputed industrial groups. It is the head that tells you to be rational and evaluate each stock purely on merit. Every great company need not be a great stock because any stock can be good at a certain price and bad at another price.

2. Investing your entire corpus in one go

The moment you have a lump sum at your disposal, the first temptation is to invest the money the next day. After all idle money has a cost, is your argument. Again, that is a mistake to be avoided. There are two ways to look at this issue. Firstly, take a call whether this is the right time to invest or should you wait. Alternatively, look to invest in a phased manner, so that you can make the best of intermittent price dips. Your cost of acquisition makes a big difference to your eventual ROI.

3. Being driven by fear and greed like the herd

Stock markets are driven by the two primordial sentiments of fear and greed. The whole problem is that we apply fear and greed at the wrong time. When the Nifty had fallen to 4,500 in 2013, most investors were wary of investing. The same investors are willing to buy when the Nifty is at 12,000. The reality is that we should treat our equity buys exactly like we approach a bargain sale. A good product has to be better at a lower price.

4. Buying stocks without reference to your risk capacity

Equities tend to outperform other asset classes over the longer term but in the shorter term equities can be extremely volatile and could even underperform other asset classes. That means, before getting into equities you should be clear about a long term perspective of at least 5 years. Secondly, if you have a low risk appetite then mid caps and small caps or even concentrated portfolios may not be your cup of team. Match your investments to your risk capacity.

5. Trying to win the market by overtrading

It is not your job to try and time the market. Buying at the bottom and selling at the top exists only on paper and even the best of investors have not managed it consistently. Above all, trying to time the market leads to overtrading and you just add to costs and lose out on opportunities from holding equities for the long term.

6. Driving your investments looking at the rear-view mirror

Whether you are driving your investments, don’t focus too much on the rear view mirror. Your selection of stocks and investment strategy can’t rely too much on what has happened in the past. Instead, the focus should be on what is likely to happen in the future. Equities are all about the future and a rear view approach will hardly be of any help.

7. Diversifying risk for the sake of it

To begin with, spread your risk across sectors, themes and even asset classes. Putting all your eggs in one basket is not a good idea. Even if that is axiomatic, we still err on how we diversify. Firstly, you must avoid over-diversifying. Beyond a point, you only substitute risk. Secondly, to diversify you need to add assets with low or negative correlations. Only then it helps!

A lot of investments go awry because we were wrong in the first place. It makes sense to avoid these mistakes.

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Top 7 Common Investing Mistakes and How to Avoid Them?

07 Aug 2019

Buying or investing in equities is not just about doing the right thing but a lot more about not doing the wrong things. Quite often, we tend to be conditioned by some ingrained practices from the past and that in turn impacts our investment decisions. This leads to investment mistakes along the way. Let us look at 7 such investing mistakes that investors need to avoid.

1. Letting the heart rule over the head

How often have you fallen in love with your stock portfolio? Quite often, investors refuse to accept that the fortune of the stock or the sector have structurally shifted. More so, in case of large blue chip stocks or stocks belonging to reputed industrial groups. It is the head that tells you to be rational and evaluate each stock purely on merit. Every great company need not be a great stock because any stock can be good at a certain price and bad at another price.

2. Investing your entire corpus in one go

The moment you have a lump sum at your disposal, the first temptation is to invest the money the next day. After all idle money has a cost, is your argument. Again, that is a mistake to be avoided. There are two ways to look at this issue. Firstly, take a call whether this is the right time to invest or should you wait. Alternatively, look to invest in a phased manner, so that you can make the best of intermittent price dips. Your cost of acquisition makes a big difference to your eventual ROI.

3. Being driven by fear and greed like the herd

Stock markets are driven by the two primordial sentiments of fear and greed. The whole problem is that we apply fear and greed at the wrong time. When the Nifty had fallen to 4,500 in 2013, most investors were wary of investing. The same investors are willing to buy when the Nifty is at 12,000. The reality is that we should treat our equity buys exactly like we approach a bargain sale. A good product has to be better at a lower price.

4. Buying stocks without reference to your risk capacity

Equities tend to outperform other asset classes over the longer term but in the shorter term equities can be extremely volatile and could even underperform other asset classes. That means, before getting into equities you should be clear about a long term perspective of at least 5 years. Secondly, if you have a low risk appetite then mid caps and small caps or even concentrated portfolios may not be your cup of team. Match your investments to your risk capacity.

5. Trying to win the market by overtrading

It is not your job to try and time the market. Buying at the bottom and selling at the top exists only on paper and even the best of investors have not managed it consistently. Above all, trying to time the market leads to overtrading and you just add to costs and lose out on opportunities from holding equities for the long term.

6. Driving your investments looking at the rear-view mirror

Whether you are driving your investments, don’t focus too much on the rear view mirror. Your selection of stocks and investment strategy can’t rely too much on what has happened in the past. Instead, the focus should be on what is likely to happen in the future. Equities are all about the future and a rear view approach will hardly be of any help.

7. Diversifying risk for the sake of it

To begin with, spread your risk across sectors, themes and even asset classes. Putting all your eggs in one basket is not a good idea. Even if that is axiomatic, we still err on how we diversify. Firstly, you must avoid over-diversifying. Beyond a point, you only substitute risk. Secondly, to diversify you need to add assets with low or negative correlations. Only then it helps!

A lot of investments go awry because we were wrong in the first place. It makes sense to avoid these mistakes.