MONEY MISTAKES: Keep a check on your emotions and behavioural traits to invest right
Financial choices that we make have long-term repercussions. However, our choices are often based on our past experiences or those of our friends and family. We tend to stick with decisions that yield good returns and avoid those that cause losses, seldom reviewing the reason behind the results. By forming strong notions about financial planning, we sometimes miss opportunities that can prove beneficial for us. Our mind, thus, plays a trick on us to hinder the wealth-creation process.
If you truly want to grow your money, ensure that you do not fall prey to these tendencies:
Lack of understating leads us to make imprudent decisions, taking us further away from our goals. Investment and financial planning are no different to this rule. In the absence of knowledge about markets, investors refrain from adding the power of equity to their portfolios. False beliefs, like fixed income instruments are the best investment options, slows down the process of wealth accumulation. Similarly, relying on hearsay or friendly tips without due diligence, causes more harm than good. Do research before committing your hard-earned money to an investment avenue. Thoroughly understand the available investment options, their nature, scope and rate of returns to make the right choice.
Inflated by ego, investors tend to believe that that they are better than others at selecting the right investment options and that they know the best time to enter or exit the markets. Such overconfidence makes an investor complacent and blind to market signals, facts and trends. A bloated ego also prevents investors from admitting a failure and pulling their money out from underperforming options at the right time. It is advisable to keep ego aside and seek guidance to make the right investment decisions. Studying to acquire knowledge and asking for help from experts when needed also keeps ego at bay.
Reluctance to invest in certain sectors, asset class and, in few cases, reluctance to invest altogether limits the chances of building a fortune. For instance, investors averse to equity as an asset class find it difficult to reach their financial goals in the absence of growth option in their portfolio. If the resistance is due to some past experience, a viable strategy would be to opt for a staggered investment approach or Systematic Investment Plans (SIPs). Investing regularly in small amounts is convenient and helps to ride the market ups and downs, making volatility a friend. Once the visible proof of growth starts to flow in, inhibitions against such investment options start fading.
There are investors who feel strongly about certain asset classes/specific sectors because they gained from those investments in the past. Staying invested in their chosen asset class/sector makes them feel assured about their investments. The attachment clouds their rational decision-making abilities and they do not realise that by holding on to such investments, they are losing out on better opportunities. As markets evolve constantly, investors must review their portfolio unbiasedly in the light of emerging trends. By ensuring that your investment decisions are guided solely by the latest data and not by an emotional attachment to what was a good investment in the past, you can grow your net worth significantly.
When it comes to investment, most investors fear losses and hence pick safety over rewards. They invest in fixed income assets that give predictable and assured low returns instead of growth assets like equities. However, participation in the equity market is imperative if you aim to create long-term wealth. Despite the cyclical ups and downs, equities have historically offered inflation-beating returns. To build long-term wealth, it is important to overcome fear and find ways to participate in equities more effectively. Invest in well-researched stocks which are validated by experts or leave your investments in the hands of professional financial planners.
The writer is MD & CEO, Axis Securities