It is that time of the year when we celebrate festivals that commemorate the victory of good over evil, where the demons are defeated.
When it comes to our finances, there are certain demons, which if not tamed, can destroy our wealth irreparably. That’s why it’s important to not only identify these demons, but also beat them to ensure that our finances are in a good shape.
Here are the 10 demons, which if not tamed in time, could actually ruin our wealth.
1] Timing The Market: Ideally, you would like to buy a stock when it is at its lowest price, and sell it when it is at its highest price. However, even the most successful investors cannot time the market. Instead, it is important to invest at regular intervals with a long-term horizon. Investing regularly and staying invested in the markets is key to creating wealth. If you are trying to time the market, you will most likely to end up making losses. Instead, it is important to spend time in the market.
Says Amit Suri, director, and CEO, AUM Wealth, a financial services company, "A lot of time, investors try to time the market, whereas even if you get it right, it's hardly going to make much difference if you are looking at long-term investments. A better way of timing the market is to go systematic either through STP or SIP. Even looking at a concept like Booster STP from ICICI Prudential Mutual Fund is a better way."
2] Investing Blindly Without A Goal: When you are preparing for a marathon or trying to lose weight, you have a goal in mind. That’s how you train accordingly. The same applies to finances, too. When investing, it is important to have an idea of your end goals. Depending on the amount of money you need and the time you have left for the goal, you need to select your investment instrument and strategy. For instance, if you need the money for your retirement 25 years from now, you can invest the majority of your money into equities. However, if you require the money for your daughter’s wedding in two years’ time, it is wiser to invest in a safe option, such as fixed deposits.
3] Lack Of Patience: The market movement is natural, and it is also not possible that you grow your wealth overnight. Also, reacting to market volatility on a short-term basis will not help. One big mistake investors tend to make is that they become impatient and want to make money quickly. More often than not, this lack of patience comes in the way of creating wealth over the long term.
4] Chasing Returns: It is very important to understand the relationship between risk and returns. Risk and returns need to be balanced. As a rule of thumb, do not chase returns that someone else has got. You needs and goals are different and so are your risk readiness and return expectations. If your investment fundamentals are in place, the returns will come. Says Hemant Beniwal, certified financial planner, and director at Ark Primary Advisors, a financial planning firm: “Equities can give a lot of pain. Black Mondays and Furry Fridays can happen anytime.”
5] Not Planning For Taxes: When looking at any investment, it is also important to plan for taxes. For example, when looking at returns from fixed deposits, it is important not only to look at the returns but also at the tax you need to pay on maturity. So, it is important to plan your taxes and avail available deductions, and accordingly make your investments tax efficient.
6] Failing To Diversify: As the saying goes, you should never put all your eggs in one basket. Investments need to be diversified across different asset classes based on your risk appetite. It is not a wise thing to invest all your money into equity or debt. Even within an asset class, such as equities, it is essential that you spread your investment across different stocks or stocks belonging to different sectors. Not diversifying your portfolio could destroy your wealth in no time.
7] Following Trends: Following trends could seem alright when it comes to the latest fashion trends, but certainly not when it comes to your finances. It must be strictly avoided. Sometimes, the desire to earn returns in a short period of time may tempt one to invest in the latest fad or craze, without doing proper due diligence, and more often than not, such fads would already have lived their course and could lead to losses.
8] Investing Based On Tips: Following hot investment ‘tips’ are one of the most sure-shot ways to make investment blunders. While you should discuss your investments with your financial planner, it would be a grave mistake to invest or buy a financial product based on tips from a co-worker, or tips that you could come across on social media. Every ‘tip’ you received should be analysed for its merits before you follow them.
9] Over Monitoring: Our portfolios should be monitored and reviewed at regular intervals (every six months or one year), but one should not make the mistake of over-monitoring them. Stock markets move up and down on a daily basis, and monitoring your portfolio on a daily basis is not only a waste of time, but can also cause undue stress and make you take wrong decisions.
10] Withdrawing Long-Term Corpus For Short-Term Needs: Our goals can be divided into short-term goals (going on a vacation, buying a car), and long-term goals (savings for a child’s future and retirement). Long-term goals can be met through investing regularly for a long period, and reaping the benefits of the power of compounding. However, if one withdraws money invested for long-term goals for short-term needs (for instance, if you redeem mutual funds invested to build your retirement corpus for a Europe trip) you will be making a big mistake, as your long-term goal will be in jeopardy.