Perhaps the most basic confusion that you should get cleared of is the confusion between trading and investing.
Trading is something that you do without much planning or research – that is you are said to be trading when you buy and sell stocks and mutual funds at will. Trading might not help you build long term wealth but could bring good money to your broker. So it is important to understand the basic differences between trading and investing before taking the plunge.
Investing takes a lot more research and well thought planning in the different avenues of the investment. Your investment amount, your risk appetite, the present market conditions and some basic studies about the future of the markets and many other factors go into making the best investment strategy for you. Most people prefer to take a very conservative stand and invest in traditional products like bank deposits, public provident fund and so on. Their argument is that the traditional products ensure guaranteed returns though they are comparatively lower than returns from stocks or mutual funds or equities.
However, a good investment is not only about guaranteed returns but about real returns. Real returns are returns post inflation. And it is always better to calculate these real returns considering the complexities involved in today’s economic scenario especially inflation.
Not taking a very conservative stand doesn’t mean you should play aggressive in the markets. An investor is bound to lose money even if he chooses to take a very aggressive stand by investing his money in high risk avenues such as equities without even taking enough care to understand how they work.
The middle path is always better so that you can always make changes to your investment basket according to market conditions.
One of the most common mistakes some investors make is holding on to the dud stocks. A dud stocks need not necessarily mean only non performing stock; it could also mean purchasing stocks of unheard companies. Never buy stocks of unheard companies even if they are doing well while you are planning to buy them. It could well be just a short term stint because these unheard companies never have in them, the thing to perform well on a long term and their stocks might soon turn to be duds. There are many instances of such companies and their stocks turning dud over a period of time. Hence, it is important to invest in performing stocks, and at the same time have a backing from a good fund manager. For example, you could invest regularly in small amounts through systematic investment plan (SIP) and make money by holding on to them for a long term.
Your investment basket should be filled with the right type of assets for good long term returns. And remember to fine tune the basket at regular intervals depending on how the market behaves and in line with your risk appetite and financial goals.
Improper asset allocation like investing in too much of debt for the long term or irregular investments in equity for the coming quarters could put you in an awkward position and leave you with no or little returns. This is one area where even the experts fumble. Markets are highly unpredictable even in the short to medium terms. Though there are some parameters to predict the market like the changes to the country’s socio, economic, political and business spectrums, there is no fixed rule to say how markets would react to these turn of events. Hence, it is advisable to stay away from reading too much into such parameters while timing the markets. Instead, you could go in for a closely controlled investment strategy that could help you make money in the long term.
Ask the long term players in the markets and they will perhaps warn you against being overconfident with recent successes. There is nothing wrong in hoping for the best times but overconfidence is something an investor should do away with. It is important to understand that your successes in the markets could have been due to many ‘hidden’ factors that might have escaped your attention. Overconfidence in your so called ‘perfect management of portfolio’ might spell trouble and you might end up losing money.
Avoid these common mistakes at any cost. After all, a good beginning is half the battle won!!!!