Investing money in the capital market is one of the popular strategies to maximise personal wealth. Be warned, this option should not be confused with a get-rich-quick scheme. Putting your hard-earned savings in securities is always a gamble, as stocks are largely influenced by uncontrollable external factors such as company performance, market trends, and economic policies. So, returns are never guaranteed. However, this should not deter you from kick-starting your investment journey. To excel at the art of investing, you should first understand that every person’s financial goals and risk capabilities are distinctive. This implies that your investment plans should entirely be contingent on what makes sense for your portfolio and future goals.
In this article, we will discuss some common investing mistakes beginners make. By being aware of these mistakes, you can avoid anything—from slight oversights to grave errors—in your share market endeavours.
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Investing without understanding
Putting your money in stock without comprehending how the company’s business model works is the worst mistake you could possibly make. If you decide to invest in individual stocks, ensure that you meticulously go through the company’s financials, past performance, growth opportunities, and weaknesses. Alternatively, you can cultivate a diversified portfolio of ETFs (exchange-traded funds) or mutual funds while you get acquainted with the individual stocks and market dispositions.
Being impatient
Expecting your invested money to give you a ten-fold return in a short period is simply unrealistic. Entering the market with a trader’s mindset is one of the biggest investing mistakes beginners make. Traders mostly use derivative instruments like futures and options alongside vast technical data to leverage daily price movements, which is redundant for long-term growth.
Conversely, investing is all about the bigger picture, which only manifests when you are prepared to wait. So before setting foot in the world of capital markets, make peace with the fact that stock investments take their time to flourish. Likewise, foster a forward-thinking approach as you will be dealing with slow growing assets demonstrating a potential for higher returns.
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Refraining to diversify
Professional investors may be able to generate alpha (excess returns on a benchmark) by investing in concentrated positions, but common investors should not adopt this approach. It is prudent to embrace the diversification tenet to avoid investing mistakes that could cause heavy losses.
You could capitalise on mutual funds or ETFs; you will be able to distribute your wealth across companies and different industries, which significantly lowers risk levels. As a beginner, allocating all your money to company-specific or industry-specific stocks can prove to be lethal for your portfolio if a major economic downturn were to emerge in a particular sector.
Getting emotionally invested
Another investing mistake beginners often commit is letting their emotions take the wheel. This could involve a variety of scenarios. For example, you can be hasty about investing more money in your favourite stock or panic due to temporary lulls in the market, resulting in impulsive selling.
To avoid such fiascos, you should accept that investing in securities is a long-term game. While emotions are an inevitable part of the human psyche, recalibrating every now and then to assess the situation neutrally is imperative. Ultimately, if you take some time and revisit your spur-of-the-moment decisions during uncertain circumstances, you will realise it is always smarter to hold off.
Excessive investment turnover
Getting in and out of investment positions or turnover is another investing mistake to avoid. High levels of investment turnover is a sure-shot recipe to decrease your returns. If you are not an institutional investor with access to discounted commission rates, the expenses associated with these transactions will palpably reduce your profits. Besides transaction costs, you will have to incur short-term tax rates and the missed chance to capitalise on the long-term growth of more rational investments.
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Relying on amateur recommendations
While turning to family and friends for advice is the most natural thing to do, it might not be the best decision in the case of stock investments. Their recommendations may work for their portfolio but could very well prove to be ill-suited for your goals and risk appetite. While there is no harm in hearing out different perspectives, you should exercise due diligence by learning more about a stock to make the right call.
Trying to mimic the success of an institutional investor
You might be in awe of institutional investors like Warren Buffet, who has achieved remarkable success with his stock portfolio. But attempting to emulate his triumph is a naive move. Assume you want to invest in one of the stocks listed in your hero investor’s portfolio, which costs Rs. 250 apiece at the moment. However, you need to understand that they bought these shares at a different entry point, i.e., Rs. 20 apiece five years ago in concentrated quantities. Similarly, they might have invested in sector-specific stocks for which they possess a justifiable risk appetite. This might not be the case for you. So, avoid such faulty investment tactics and consciously choose a strategy that works best for your portfolio.
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Closing thoughts
Investing mistakes among beginners is not uncommon and, in most cases, is nothing to fear. Regardless, you are advised to avoid them altogether by choosing securities that are appropriate for your growth. Some of the easiest solutions to ensure this are running a background check on the stocks and companies to analyse past and current performance, keeping an eye on market trends and fiscal headlines, and avoiding emotional investing.
