- Posted by: Brighter Mind
- Category: Time Value of Money
Investment is a great tool of building wealth in a long term. The common way of investing is to buy the stock of good company and hold it for long term to get good returns. However many investors think equity investment as a get rich quick game or strive to get maximum returns possible in shorter time frame. But the reality is creating wealth with the help of investments take time, and many investors commit some mistakes while understanding this fact.
Below are some common mistakes which common investors make and should be avoided in order to get good returns out of market.
- Timing the Market
Just think how great it would be, if you can enter any stock at the lowest price and sell it on the highest price. Minting money would be on snap of finger in this case. But the fact is that no one can predict the ups and downs of the market.
Many investors wait for the market bottom out to enter the market. The investor should understand that market timing cannot be predicted and no one knows the next move of the market. What is important is that you enter the stock at the good price. Whenever you see that any stock is trading at undervalued price, you should invest in that stock and stick to it for the longer term.
- Lack of Patience
Investing is a long-term game. A disciplined and steady approach to investing leads to higher returns in longer term. Expecting the portfolio to yield multi-fold return overnight or shorter span is the most common mistake done by the investor. Keeping patience is the key to investing as it creates slow and sustainable wealth over time. Many investors lack patience and in the end tend to lose the big opportunity of creating good wealth.
- Improper Diversification
Diversification is yet another important concept as far as investing is concerned. Diversification reduces risk of investment and offers the opportunity to generate good returns. It is a proven risk management technique to reduce the unsystematic risk of your portfolio. However, proper diversification of portfolio is important in order to get maximum benefit.
Over-diversification and under-diversification are the two common mistakes generally done by investors. Over-diversifying the portfolio will reduce the return potential of the portfolio and under-diversification will increase the downside risk of the portfolio. Hence it is important to systematically diversify the portfolio so that the returns are not impacted and the risks are well managed.
- Investment driven by emotions
Another mistake often committed by investors is emotion driven investment decision. There are two emotions which generally drive the market – greed and fear. They are the reason for market volatility and the investors are generally seen falling in trap of these emotions.
But instead on focusing on greed and fear of market, investor should see the bigger picture in the long run. When the decisions are driven by analysis and not by the emotions, investments tend to generate higher returns in the long term. In fact patient investors generally get the benefit as compared to the investors who panic or get greedy easily.
As great investor Warren Buffet said “Be greedy when others are fearful and be fearful when others are greedy”.
- Waiting to recover loss
Another common mistake made by the common investor is waiting to recover the loss when any stock plunges. It means whenever any investment decision goes wrong, rather than selling the stock in loss, investor tends to stick to that stock till the time it gets back to its original price.
This is because of two things – first is that the investor is not comfortable to book the loss thinking that it is a long term investment and the stock will give returns or at least break even in the coming period. Other reason is that the investor gets emotionally attached to the stock and do not want to sell it.
But the investor is losing in two ways in certain scenario. First is that not selling the stock may further lead to bigger loss. Second is losing the opportunity of investing the redeemed amount in the better stock which can not only recover that loss but also produce extra returns on the investment.
Mistakes are the part of investing world. But knowing some common mistakes can help you succeed in investing by avoiding them. The disciplined approach towards investing and implementing the plan with proper analysis can help you sail your boat to wealth creation.
Remember, investing can create wealth only in long run and when it is done consistently. Also, it is recommended to analyse the stock or take the help of SEBI Registered Investment Advisor before investing in any stock so as to generate good returns out of market.