For many, investment is unchartered territory. This guide will help you make smart decisions about your investments.
Investing may seem daunting, but it's an important step towards securing your financial future. As a beginner, you may feel uncertain and face the possibility of making mistakes, but by educating yourself and seeking the right guidance, you can minimize the risks and maximize the rewards of investing.
Without adequate knowledge about all the available investment funnels and their risks and benefits, one mistake can cost you big bucks, sometimes even a fortune.
Hence, we have prepared a comprehensive guide to help you understand the basics and common investing mistakes one should avoid.
This list of 7 investing mistakes to avoid will aid you in making the right investment decisions, whether that's by choosing the right mutual fund or stock exchange.
1. Not having an investment plan
For most people, their investment goal is to grow money at minimal risk. Fair enough, This is why having a plan is important.
You need to consider what you want your investment portfolio to look like and how much money you're willing to invest in each asset class.
You can create an investment plan by answering these questions:
- What are my goals?
- How do I want my investments to help me reach them? (Eg. mutual fund, bank FDs, stock market) Will this be the only way for me to meet those goals?
- Are there other areas where I can invest (i.e., real estate, digital gold)?
- What kind of return should I expect from each type of investment (stocks/bonds)?
2. Buying and holding stocks
Buying and holding stocks is a good investment tactic. It's long-term, but it doesn't guarantee you'll make money yearly.
Professional investors may be able to yield excess profit. But if you are a beginner, it is an unnecessary risk.
You need to be smart about what stocks you buy and how many so that when one stock goes down, it doesn't drag down your entire portfolio.
The wisest way to go about it is portfolio diversification - a great way to diversify your portfolio.
For instance, while investing in exchange trading or mutual funds, ensure your investment is exposed to all major spaces.
Similarly, try including all major sectors while investing in the stock market. Your ideal thumb rule would be not to allocate more than 5% to 10% in one investment.
3. Buying a company's stock because you like its product/service
You may like Sunsilk shampoo. But that doesn't mean you should invest in Unilever (Sunsilk's parent company).
Buying a company's stock just because you like its products is a bad idea.
Investing in companies with a sustainable competitive edge is the best way to build your wealth with investments.
It means the companies can compete effectively against their competitors and peers for customers and profits.
These are the types of companies where you can park your money, and rest assured that you'll get paid back your initial investment many times over because of their long-term success and growth potential.
Another reason you should avoid buying stocks based on personal preference is that most people may not know much about the business.
If you are a beginner, it would be hard to evaluate the stock value correctly. If something goes wrong later down the road or sooner, you won't be anyone who can help you!
4. Trying to time the market
The market goes up and down, but there is no way to know when the best time to invest is.
The stock market is unpredictable, so it's not a good idea to try to time it. If you need money for something soon (like buying a car), wait until after that purchase before making any long-term investments.
The best time for investing depends on how much disposable income you have at any given time and what kind of returns are expected from your investments over their lifespan.
5. Changing investment plans often
The most common money mistake among beginners is changing their investment plans often. It's important to have a long-term investment plan but stick with it.
The reason is simple: if you change your plan too frequently, you won't be able to earn compound interest and will end up losing money in the long run.
One way of ensuring this doesn't happen is by investing in mutual funds or digital gold instead of stocks. They offer higher returns but tend not to fluctuate too much.
They are much more stable. Therefore, if you are someone who wants steady returns over time rather than quick profits, ensure you invest in the right asset class and stick to it.
6. Picking investments based on past performance
One of the most common mistakes new investors make is basing their decisions on past performance. This can be misleading.
Past performance does not guarantee future returns. Hence, it should not be considered an indicator of investment risk.
When you decide to invest in a company's stock, it's important that you look at more than just its financials.
You should also consider what kind of customer base it has and examine its brand recognition and reputation among consumers.
These factors indicate whether or not this company can sustain itself through the years ahead (and beyond).
While considering areas to invest in, it is important to check all the possible options.
If you happen to like a particular product or service offered by one company but aren't interested in investing due to its financial condition (even though they may have been profitable last year), there might be other companies in that same industry where your investment can yield better results without too much risk!
After all, it is your hard-earned money!
7. Investing without understanding the risks
It is important to know the risks involved in any investment. The more you understand them, the better equipped you are to make an informed decision.
Here are some of the most common investing mistakes beginners make. Make sure you don't make them.
- Investing without understanding the investment
- Not understanding how long it takes for assets to grow (or decline)
- Letting emotion rule investment decision
Here’s more: 7 Trends Revamping Investment Habits
The key to avoiding these mistakes is to educate yourself about personal finance first.
You can learn a lot about investing by reading books and articles. You can also follow leading finance gurus.
However, the best way to avoid making investment mistakes is to talk to a professional.
Remember, your investments today are your sustenance for your future (probably your retired life). So, you must make investment a habit and avoid doing it on a whim.
The best way to make savings a habit for beginners to invest in is through the Jar app daily. It is a micro-savings app that allows you to save as low as ₹10/day or ₹5,000/month.
Once you download the Jar app, it scans your SMS folder to detect your online purchases' payments.
The app automatically deducts the difference from your bank account using UPI to invest in 99.9% pure digital gold through Safegold.
It then rounds off the amount nearest to 10 and generates a spare change for your expenses.
But the most important investing rule for all is that you keep an open mind. Don't take anyone's word for it—find out what works best for you and only pursue that path if it makes sense!
Read more: Top 10 High Return Investment Options in India
In a nutshell
The key to avoiding these major investment mistakes is to educate yourself about personal finance and start early.
Although it is said that learning never stops, it is also true that after a certain time in life, you start losing interest in learning something new.
Today, people start their investment journey in their teenage years. Hence, it is crucial that you start early.
Once you have significant knowledge, you'll be better equipped to make good decisions and avoid common pitfalls related to investing.