In the heady days of bull runs, we tend to make far more investment mistakes than in normal times. Sure, most of us make money when the market is going up. But, when the bull run ends, we all have stocks and funds we wished we had never bought.
It is an established piece of investing wisdom that, to make money over the long-term, all you have to do is make sure you don't lose it.
Or, to put it in a different way, you don't so much have to do the right thing as you have to simply avoid doing the wrong ones. This may sound simple. But, if you look at reality, it turns out that avoiding mistakes are just as hard, if not more, than doing the right things.
Here are some common investing mistakes.
1. Having a piece-meal approach
The biggest and foremost roadblock to building a successful portfolio is the failure on an investor's part to look at investing in a holistic way.
Investments are not pursued with proper planning and a goal in mind. Instead, a sales pitch from a broker, a mutual fund agent or an insurance agent guides our investment decisions. And, yes, the year-end frantic tax planning too.
Do not judge the investment-worthiness of an avenue right at the moment of making the investment. Then, you will look at current market conditions only. For instance, when the stock market is rising, you will not look at investing in National Savings Certificate. But, the moment the market crashes, you will run to it. Or, just before March 31, you may end up buying an insurance policy you don't really need.
Your investment decisions should not be a collection of random individual investments.
2. Making the wrong choices
Here, we refer to the problem of being invested in wrong companies or mutual funds of the right type. So, it may be right for you to invest in diversified equity funds but you may have selected the wrong funds. Or, investing in stocks in the pharma sector may be a good idea, but you may have zeroed in on the wrong companies.
Investors have a tendency to get carried away with the current hot performers and tips from everyone. Always look at long-term performance where funds are concerned, and future growth prospects where a stock is concerned.
3. Going for too many or too few
This is a common problem with portfolios; specially in the case of mutual funds.
Many of us keep on adding investments in the name of diversification. Fund investors normally think they are getting the units cheap if they buy them at Rs 10 each, so they invest in virtually every new fund that comes into the market.
Having a huge portfolio ensures nothing except complexity. Diversify sensibly and objectively.
While most investors have the problem of plenty, some are guilty of too much concentration. Letting just a few stocks or a fund managers determine your financial fortunes might not be an ideal situation to be in.
Ideally, a portfolio should have at least five to eight stocks from at least three distinct sectors. Fund portfolios should not have less than four funds, preferably by different fund managers.
4. Chasing returns
The anxiety of missing out on the opportunity of becoming rich overnight in a bull run often induces even the disciplined investors to stray. There are times when greed takes over the long term view of investments and you may start investing in funds and stocks that have no right to be in your portfolio.
So a portfolio that was well on track to achieving your goals taking into account the risk you can take is now suddenly derailed.
5. Getting out of focus
Sometimes you may feel you are doing a job investing and being focused, but that may not be the case if you take a good look at your portfolio.
You may have invested in a few mid-cap stocks but, if you look at your mutual funds, you may find that a number of your funds are heavily invested in mid-caps. Or you may have invested in mid-cap funds.
Ditto with certain sectors. You may have bought a lot of stocks in the infotech sector and your mutual fund too may be heavily invested in tech stocks. That means your overall portfolio is skewed towards infotech.
Finally, when approaching your goal, it is safe to shift from equities to fixed return investments. Let's say you began saving for a home and gave yourself a five year deadline. If you are getting substantial returns on your shares after three years, you can sell them and put the money in a two-year deposit. If you wait to sell the shares when you near your five-year deadline, and the market is down, you will be in a soup.
6. Ignoring tax
When selling funds or stocks, tax considerations are the last thing on an investor's mind. But, you could save a lot by merely delaying your decision to sell by a month or two.
If you sell your shares or diversified equity funds after a year of buying, you pay no tax. So don't be too hasty to sell soon after buying just because of a small profit.
Or, if you want to invest in a diversified equity fund, you could look at an Equity Linked Savings Scheme. This is a diversified equity fund that offers a tax benefit under Section 80C. Other diversified equity funds do not offer this benefit.
So, here you are. If you find yourself committing any of these mistakes, step back and rectify them. If not, that's fine. But do keep them in mind to ensure you do not commit them in the future.
This article appeared in the magazine Wealth Insight.
More from rediff