Friday, Sept 13 2023
Source/Contribution by : NJ Publications
If you are an experienced Indian investor in equity markets, you know that investing is a long-term game. It takes discipline, patience, and an understanding of the risks involved to be successful. However, there are many investors that continue to make mistakes. New investors are particularly vulnerable to making investment mistakes, as they may not have a full understanding of the market or the risks involved. In this article, we will discuss eight common mistakes that new investors tend to make and how to avoid them.
1. Setting wrong expectations
One of the biggest mistakes that new investors make is setting wrong expectations. Most new investors enter markets during or once the bull run has reached its peak attracted by high returns. They may expect to get rich quickly or to see double-digit returns every year. However, the reality is that investing is a long-term game, and there will be ups and downs along the way.
Setting the right and realistic expectations is crucial, especially when you are a new entrant and have seen only double-digit returns on the portfolio. It is not always going to be a straight line. We need to accept that the market can be volatile and that you may experience losses from time to time.
2. Not having a long-term investment horizon
As mentioned earlier, investing is a long-term game. It is important to have a long-term investment horizon especially when investing in the equity market. This means being prepared to hold your investments for at least five to seven years, or even longer. As we increase our investment horizon and invest for the long term with focus on the basic principles of investing like diversification and asset allocation, we are likely to see positive returns and fewer chances of losses or negative returns. While doing this, we would also need to avoid reacting to temporary fluctuations and noise in the markets in the short term.
3. Not understanding the risks
Investing in the equity market involves risk. The value of your investments can go down (or up) as soon as one invests. Thus, it becomes important to understand where you are investing and the risks involved in the same before investing. There are a variety of risks associated with investing in the equity market, including market risk, company risk, sector-specific risks and so on. While some of the risks can be managed by diversification and by investing in mutual funds, some risks will still continue to exist. Further, risks are not limited to just equities and extend to all asset classes, including debt, commodities and physical assets. When evaluating risks, we need to understand the asset class, and the holding period and then evaluate the risks and make informed decisions.
4. Being impatient /selling too early
Another common mistake that new investors make is being impatient. They are generally looking to make quick returns and if the investments do not perform in line with their expectations, they tend to sell /redeem their investments and move to the next one. This is often done in response to market volatility or a temporary decline in the value.
However, it is important to remember that the equity market is a long-term game. Short-term fluctuations should not dictate your investment decisions. If you believe in the long-term prospects of your investment, you should hold on to your investment ignoring the short-term volatility of the markets. If you have a short-term investment horizon, you are more likely to sell your investments too early and miss out on potential gains.
5. Trusting social media and listening to noise
Social media can be a great source of information, but it can also be a breeding ground for misinformation and noise and also distraction. New investors should be careful about trusting what they see on social media and other media outlets. Remember, they have a daily show to run and have good TRP while your objective is long-term wealth creation. Lately, there has been some measures being taken where unqualified financial influencers have been found to promote false success and money making stories in order to gain followers. It is important to do your own study and verify any information you receive from media outlets. You should also be wary of any investment advice that seems too good to be true.
6. Trying to beat and time markets
Many new investors try to beat the market by trying to time the market. However, it is extremely difficult to consistently beat the market over time. Even professional investors struggle with this and rarely do you find someone experienced ever claim to do it.
Instead of trying to beat the market, invest consistently with discipline as per your risk profile. SIP in mutual funds is perhaps the best way to time the markets where with recurring investment every month, you buy more mutual fund units when markets are low and buy less when markets are at highs. Over the long term, the ability to hold and stay put has proven to contribute the maximum to your returns.
7. Mixing Trading with Investment
Trading is the act of buying and selling stocks in the short term with the goal of making quick profits. Investing is the act of buying and holding investments for the long term with the goal of generating wealth over time. Trading is a risky activity that is best left to professionals. Unfortunately, in the world where crypto-currencies are seen an sound investment avenue, there is no surprise that trading too is seen by many as an investment activity. There have been numerous media reports on how very few people succeed in making decent profits through trading activities. As new investors, we need to differentiate between the two and see investment for what it is - boring, long-term, knowledge and patience driven, and not something that requires some high IQ.
8. Investing directly /DIY without experience
There have been studies that point out that a lot of new investors often churn their portfolio heavily in the initial years. Further, it has been seen that many Do-It-Yourself (DIY) investors often start and stop SIPs too very early in the investment journey. There is a constant urge seen in new investors to find the best performing investment and invest in the same. However, there have been many studies that the top-performers (as on date) are never consistent and change very often. Fund selection goes much beyond this. Such type of investment behaviour is often seen when you are not experienced and haven’t put in efforts to educate yourself and learn. A helping hand from your mutual fund distributor or investment advisor can go a long way in shaping your investment approach in the right manner and avoid initial setbacks when you start your journey.
Conclusion
Investing is a lifelong activity and can be very rewarding once you are committed to learn and practice the art. The eight points mentioned above is not an exhaustive list but something that we more commonly see. Beyond this, there can be many other Do’s and Don’ts and something to learn as we continue our investment journey. As a new investor though, the points covered above can serve as a quick guide to shape the investment approach.
