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Common Mistakes That Investors Make

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Common Mistakes That Investors Make
Deepika Asthana - 30 September 2019

An age-old saying tells us, “it is only human to err”. That is undoubtedly true. However, it is only wise to learn from our mistakes so that we can avoid them in the future. Despite being aware of the various benefits that mutual funds have to offer, investors often exit these investments, never to return. There are many mistakes that we as investors make in our investment journey. Being aware of these mistakes is the first step towards making wise investment decisions.

Exiting in Bear Markets

As asset prices start declining, investors often have a knee jerk reaction and choose to exit their positions. This is because as your investment value starts falling, your perception towards risk changes. You become risk averse and feel that the best thing you can do is to avoid the investment altogether. However, this is a folly. Investment decisions should be made after careful consideration. In order to avoid such mistakes, an investor must take into account the long-term prospects of the investment and adhere to the tenets of his financial plan.

Frequent Monitoring

It is commonly known that staying invested over the long term is likely to help an investor enjoy multiple benefits and meet his financial goals. However, access to technology has made it easy to monitor your portfolio regularly. Frequent monitoring often motivates an individual to make changes to his investment portfolio even though there might be no changes to his risk profile or return requirements.

Prematurely Booking Profits

Interestingly, an investors’ reaction to both rising and declining stock prices can sometimes be the same. As asset prices increase, investors often choose to take their money off the table and book profits. They become increasingly risk averse and feel that it is best to reduce risk by reducing exposure to equities. However, the decision to book profits should be aligned with your financial goals and the future prospects of the investment. If you are invested in a good instrument and do not require the money in the short-term, then it is better to stay invested.

Myopic View

Often investors are looking to make short-term financial gains, and choose to exit investments quickly. In the bargain, they usually miss out on the long-term benefits that an investment has to offer. Long-term investments help smoothen out daily volatility and reduce investment risk. Additionally, long-term investors can also benefit from compounding as they see their returns multiple over time.

The DIY Approach

Many investors choose to start their investment journey on their own. While this is a great option for an investor who understands the investment landscape and is well equipped to draw his own financial plan, it should not be the preferred option for novice investors. Many investors make the mistake of investing on a whim or at the advice of well-meaning friends and family. Instead, one should choose to consult a qualified financial advisor, who can guide you on your financial journey.

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