AVOIDING DEADLY
INDISCRETIONS WHILE INVESTING
· Other
people do illogical things because self-interest is involved.
· But why
does an investor behave so irrationally when it is his own money at stake?
· The answer
could be laziness or ignorance or certain behavior traits.
1. Trading in the name of investing
· People
buy and sell shares or mutual funds at a pace which only helps the
broker make money.
· The
more you churn portfolios, the more you are paying commissions to your broker.
2. Maintaining an extreme view, too conservative
or too aggressive
· Some
people don’t think beyond government bonds, provident fund and bank fixed deposits.
· As
a result, their portfolio grows at a rate which is not even above the headline
inflation rate.
· Then
there are investors who keep pumping money into direct equity without
understanding the basics of portfolio construction.
3. Refusing course correction
· People
can be bull-headed about their investments and refuse to sell because they have
been told that equities are the best bet.
· They
do not even stop to know about the companies in which they are investing.
4. Trying to time the market
· Even
smart, intelligent people believe they can time the market.
· The
probability that you will get it right is very, very low.
5. Following ‘uncle’s’ advice
· People
buy shares because an aunt or an uncle told them to.
· They
invest in some other stocks because a friend or colleague recommended it.
· Slowly,
they build a ‘list of stocks’ that they call a portfolio.
· They
overlook the crucial fact that friends and relatives are not market gurus.
6. Choosing the wrong advisor
· Most
investors ignore the conflict of interest with brokers, agents, even financial
planners.
· These
people always want more of your money invested in different places, even if it
is not required.
· As
you do not ask your barber whether you need a haircut, the same holds true for
finances.
7. Using one strategy for all
investments
· Investment
strategies for short-term and long-term goals are not the same.
· Similarly,
there is no fixed pattern to investing in equities or debt.
· But
investors seek refuge in the one strategy that gave great returns once upon a
time.
· It
is immaterial that since then it has done nothing significant for their money.
· No
one formula is guaranteed to give good returns all the time.