Bad habits that will mar your investment and how to avoid them
A big-shot executive at one of the top banks, a former colleague of this blog writer, narrated this incident about his son, who had started work in the US.
Fresh out of college and into the first job, his young software engineer son in the US decided to dip his toes into investing. Like many beginners, he was drawn to the allure of cryptocurrencies and popular stocks among his peers. He felt like a fund manager, easily making trades on his Robinhood account.
His father, a seasoned investor, recognised the risks of his son's investment strategy. He made a deal with his son: for every $500 invested in these risky assets, he would invest $1,000 in a passive or active mutual fund.
Boring Investor
The young investor initially found his father's choices boring, especially when his investments seemed soaring. When a sharp market correction hit, he lost nearly 40% of his capital.
He was tempted to sell off his remaining investments and quit. But his father advised him to hold on and stop tracking his portfolio daily. The young investor heeded this advice, and his losses were recovered over time.
Lesson Learnt
This anecdote serves as a stark reminder of the emotional rollercoaster that investing can be, particularly for beginners. It also emphasises the value of having a mentor or advisor who can provide guidance during difficult times.
Self-Defeating Investing Habits
Staying in the Comfort Zone
One of the most common self-defeating investing habits is sticking to what's familiar and comfortable. Many investors prefer traditional investment vehicles such as fixed deposits, gold, and real estate, ignoring the potential growth opportunities provided by equities and bonds.
Investors who stay within their comfort zones often fail to explore other investment opportunities that could potentially offer higher returns. This reluctance to venture outside of the familiar can limit the growth potential of their investment portfolio and impede their long-term financial goals.
Lack of Patience
Another common stumbling block is a lack of patience. Many investors check their account balances frequently, respond to short-term volatility, and abandon long-term investment plans. Successful investors understand that investments need time to mature and yield results.
Another common stumbling block is a lack of patience. Many investors check their account balances frequently, respond to short-term volatility, and abandon long-term investment plans.
No Asset Allocation and FOMO
Fear of missing out (FOMO) can cause investors to make rash decisions, such as putting all of their money into the latest trend. This misallocation of assets can expose investors to unnecessary risks and potential losses.
Asset allocation is a crucial aspect of an effective investment strategy. It entails spreading your investments across various asset classes in order to balance risk and reward based on your financial objectives, risk tolerance, and investment horizon.
Investors who do not have a proper asset allocation strategy may end up putting all of their eggs in one basket, which can be risky.
Sticking with Loss-Making Assets
Holding on to loss-making assets and hoping for a turnaround can harm your investment portfolio. It's essential to make unemotional decisions and cut losses when necessary.
Loss-making assets are frequently held on by investors due to an emotional attachment or the hope that they will recover.
However, if these assets continue to underperform, this can result in larger losses. It's essential to regularly review your investment portfolio and make necessary adjustments based on the performance of your investments.
Averaging Down
Averaging down, or buying more of a declining asset to reduce its average cost, can be a risky strategy. It's often better to sell losers and buy winners.
When an asset's price is falling, averaging down may appear to be a good idea because it lowers the asset's average cost.
However, if the asset's value continues to fall, this strategy may result in larger losses. Rather than averaging down, it may be more advantageous to cut your losses and invest in assets with a better performance outlook.
Good Investing Habits
Investing is not difficult, or as they say, it is not rocket science. In fact, if you stick to the basics, it can be quite simple.
First, create an emergency fund, then get insured. After this, invest regularly in a diverse portfolio, and let compounding work its magic.
Investing can be fun, but it is not an entertainment activity. It is a long-term commitment that requires patience, discipline, and a clear strategy.
Do This Before You Start Investing
Build a solid financial foundation before you begin investing. This includes building an emergency fund and getting adequate insurance coverage.
A solid foundation does not mean that you need a huge sum of money.
A solid foundation of having an emergency fund and insurance will ensure that volatility in markets and life don’t steer you away from the investment process.
An emergency fund can serve as a financial safety net in the event of unanticipated expenses or income loss, whereas insurance can protect you and your family from financial risks associated with health issues, accidents, or death.
Regular Investing and Diversification
Regular investing, or rupee-cost averaging, involves investing a fixed amount at regular intervals, regardless of market conditions.
This strategy can help to reduce the impact of market volatility and the risk of making poor investment decisions based on short-term market fluctuations.
To reduce risk, diversify your investments across different asset classes, sectors, and geographical regions.
A well-diversified portfolio can help you achieve your financial goals with less volatility by providing a balance of risk and return.
The Magic of Compounding
Compounding is one of the most powerful investing concepts. It involves earning returns on your initial investment and the returns your investment has already generated.
Compounding can significantly increase the value of your investments over time, allowing you to reach your financial goals sooner.
Patience, Discipline, and a Clear Strategy
Investing necessitates patience, discipline, and a well-defined strategy. Even during periods of market volatility, it is critical to remain patient and adhere to your investment strategy.
Making regular investments, reviewing your investment portfolio on a regular basis, and making necessary adjustments based on your financial goals and market conditions are all part of the investing process.
So, are you ready to change habits that can affect your financial success?
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