- Date : 20/06/2020
- Read: 3 mins
- Read in हिंदी: 5 आम निवेश गलतियाँ जो आपके रिटर्न को बाधित कर सकती हैं
Can emotionally-driven investment decisions hamper your returns? Here are some common investing mistakes that can eat into your money.
In a comprehensive study by Axis Mutual Fund, which spanned 16 years from 2003 to 2019, investor returns were seen to be lower than industry investment returns. The study saw funds delivering an annual CAGR of 18.8%, but investor returns were marked at only 12.5% during this time.
To bridge this gap, it is important to analyse investor behaviour. Personal biases like meeting current financial goals, timing the market, and inconsistent asset allocation are some common mistakes investors make. So, if you wish to get better returns, make sure you avoid these 5 investing mistakes:
1. Performance chasing
The gap between the high returns an investor expects to earn and the low returns they actually earn is known as ‘behaviour gap’. As defined by Carl Richards, this performance-chasing behaviour is driven by an investor’s emotional desire to sell high and buy low. Beware! Avoid moving around your investments based on the greed to earn higher returns. A diversified long-term investment balances market risk and delivers better returns over time.
2. Mob mentality
A common investing psychology is herd or mob mentality, and it can hamper your financial returns. An instinct to follow investment patterns of friends and family without foreseeing the outcome is not always a safe or recommended decision. Whether it is investing in hot stocks or equity funds, hopping on a passing bandwagon, especially for investment, is not the best investment plan.
3. Market timing risks
The problem with timing the market? It sounds easy, but in reality, it’s far from simple. The speculation with which an investor moves money can affect their chances of getting higher returns. Factors like transaction cost, error in timing, trading expenses, taxes etc. fail to control unintentional timing. And damage incurred during an emotional spur of unintentional timing can cut deep into investment returns. To get the best return on your investment, focus on asset allocation with the help of professional money managers.
4. Overreacting to the market
Every investor thinks differently and that isn’t going to change. But fearing the thought of investing because the market could crash in the long run is being irrational. The very nature of a market is to fluctuate, which means it will see both boom time as well as recession. While not all mutual funds are tax-free investments, taking the systematic investment plan (SIP) route can balance out purchasing costs in due course.
Warren Buffet suggests giving 'market noise' a wide berth as it can shorten your focus. And a short focus is never good for long-term profit. Making investments with a short-term goal can hamper your returns. Those who stay focused and make disciplined investments across volatile market cycles build a better portfolio and earn better returns. There are plenty of long-term investment plans in India that offer great returns despite market fluctuations.
Gene Fama Jr cautions: “Your money is like a bar of soap. The more you handle it, the less you will have.” So, avoid these 5 investing mistakes and make more disciplined investment decisions for better returns! Take a look at these 6 practical strategies to help reduce investment risk.