When it comes to investing, the landscape is like a minefield set against a backdrop of potential wealth. One wrong step can blow up your portfolio. So let’s talk about where people often misstep.
Lack of Patience
Impatience is often termed the most costly emotion with investing and comes from having unrealistic timelines. For instance, stocks are nothing but a representation of a business, and every business needs adequate time to build strategies, start production, set up distribution systems, collect revenue, and a lot more, all of which takes anywhere from a few months to a few years. However, investors expect that the shares they recently bought will move in the expected direction almost immediately, which almost never happens. And it’s this mismatch of expectations that pushes these short-term investors to sell before reaping the advantages of the business’s growth. In fact, patience has been one common trait amongst most of the world’s greatest investors, who have all held their undervalued shares for many years and have been rewarded for their patience many times over. So remember, a steady and calculative approach with a realistic time frame will yield you greater returns in the long run.
Confusing Historical Returns with Future Expectations
A common practice amongst everyday investors is to chase historical performance by investing in mutual funds that have done well in the past one or two years. However, time and again we have seen that funds that are ranked in the top quartile find it very difficult to replicate the performance in the subsequent year. But having said this, millions of investors still opt for past top performers, which mostly ends up as a mistake. In fact, this concept extends to average as well. For instance, the Nifty 50 Tri has delivered an average of 13.9% returns in the last 20 years.
Brains vs. Bulls
There is a very old saying: a rising tide lifts all boats. In that context, a bull market always pushes up some undeserving stocks, and that’s purely because these lucky stocks happen to be at the right place and the right time. A number of these freeloaders might be heavy in debt, would probably have negative growth, might have pending litigation, poor management, but nevertheless, they just got lucky. And if you too got lucky to have had them, that does not make you a brilliant stock picker. So in reality, there are two real measures of one’s investing skills. One, the value-added returns. That is, how much more your portfolio performed when compared to a benchmark. This means just because your portfolio gained 50% does not make you a stock expert when the stock market in general has gained by 70%. And.2 is what were your investment results over an entire stock market cycle. Now this phrase stock market cycle can mean different things to different people, but internally we believe it means a time period that encompasses two bull markets and one beer market. In other words, this is a pretty long cycle of ten to 15 years and not some smallish period of one to two years.
Excessive Trust in Experts
Here’s an important rule. Everybody has a conflict of interest with your wealth except you. After all, banks manage your money so that they can charge fees, financial advisors earn a commission, stock brokers make profits on every trade you make, and so called stock market experts want you to buy their subscription packages. And while it’s true that there are some well-intentioned and honest people doing their absolute best in this field, it still does not justify you putting your blind trust in them. Because for every good piece of information that may be to your benefit, there is likely to be dozens of pieces of guidance that are likely to hurt you financially. So the next time you are exposed to some expert information, stay curious, but also stay sceptical enough so that you yourself research everything you receive.
Excessively focus on taxes
The objective of investing is to maximise profits for any level of risk, with taxes being only one component to that equation. But a mistake that’s made often is to be very inflexible about the implication of taxes. For instance, many investors never sell their investments as they don’t feel like paying taxes or prefer to pay lower taxes, for which they will continue to hold on to securities much after those stocks or mutual funds have served their purpose and have reached the adequate returns net. Consider tax as one of the many factors in analysing a transaction and not the only factor. Of course, the reverse is also true. That is, don’t completely ignore the tax consequences of your investments. And with this, we conclude the ten most common investing mistakes made by investors. It was Albert Einstein who once said insanity is doing the same thing over and over and expecting a different result. Mistakes are a part of the investing process, and knowing what they are when you are committing them and how to avoid them will help you succeed as an investor.