Many times people get talking to a friend and start depending on his judgment regarding investments. It is one of the most common mistakes that is oft repeated by people leading about the losses. One should be cautious enough in not investing in businesses that one doesn’t understand. One should not buy stock in companies if one does not understand the business model of those companies. The best remedy would be to have a diversified portfolio, mutual funds. If someone wants to invest in individual stocks then it is important for him/her to understand each company those stocks represent.
One should diversify portfolio by having companies of different sizes and industries, investing in index funds that contain dozens of stocks. Consider making other investments such as purchase a rental property or purchase real assets.
Chart out your goals and decide on the amount you need to invest to realise those goals. Seek help of a financial planner to get proper planning. Stop expecting that your portfolio can make you rich overnight. Increase the investment as your income grows. Review your investments at the end of every year.
Sometime go with the urge to spend more money on investment. For this, one should always keep 'fun investment money' aside, which should be no more than 10% of their investment portfolio. In this scenario one must be prepared to lose all of the fun investment. Also, one has to choose the limit to walk away and they should stick with it.
Another thing that is repeated by the people is when the company that they have invested in starts doing well and that makes them fall in love with that company. This makes them forget the fact that stocks is only an investment and that they have invested in it to make money only. At any stage, if it is found that the fundamentals that prompted the investor to change, then that is the time when they should sell the stock. Letting your emotions rule the investment decision is the gravest sin for the investors. Without letting fear and greed overpower your decision, the investor should always focus on bigger picture. In short time, returns may deviate wildly, but in long term, returns for large-cap stocks can average 10%. One should realise this fact and remember that portfolio returns should not deviate much from those averages.
Slow-and-steady wins the race. Everyone knows it but sometime in case of stocks investors forget this mantra. Investing in stocks require a disciplined and steady approach and one should keep expectations realistic regarding the growth of each stock and the time it will take.
Short term investments and expecting to gain from quick jumping. For institutional investor, short-term investment may work as they can play on low commission rates but for individuals this won't work as the transaction costs and short-term tax rates will minimise the returns.
When you buy stocks you own a percentage of a company and thus you get benefits such as dividend payouts and capital gains. Your investment portfolio should have domestic stocks as these stocks show good growth in the long-term.
Also go for the bonds as they give regular interest income and are less volatile. They save the investor from unpredictable movements in the market. However, bonds do not give high return in long term as compared to stocks but there are some international bonds that give higher yields.
To save yourself from the local stock market shock it is important to have international stocks in your portfolio.
Have equity funds of commodities such as gas, minerals and oil in your portfolio as it can save you against inflation.
The author is the Founder & CEO, Finway