So, you have taken your first step in investing in the markets and wish to make it big, real quick. However, this journey is fraught with a number of risks and newcomers who trade while sidelining good stock market experts risk bringing their journey to an abrupt end.
While nobody amongst us is perfect and everyone makes a mistake once in a while, most of the mistakes made by new, and often old investors as well, are rather common mistakes that can be avoided. The silver lining here is you can avoid these mistakes simply by being aware of them.
So, here are the four mistakes to keep an eye out for:
1. Never invest in a business you don’t understand:
Billionaire stocks guru Warren Buffet is credited with dispensing this pearl of wisdom, which millions of investors follow religiously. Far too many times, investors of all age groups and experiences fall for the lure of the hot tip or the exploding stock price of a penny stock. More often than not, the hot tip or the meteoric rise of the penny stock has nothing to do with the fundamentals of the company and more to do with rampant underhand speculation between market players. Make sure you are not part of that crowd by investing in businesses whose intricacies you understand thoroughly. Secondly, always rely on the researched calls and reports given by reputed stock market experts.
2. Putting all your eggs in one basket:
The technical name for this investment technique is called diversification. Different asset classes- gold, mutual funds, equity, debt- have inconsistent trajectories and risk tolerance. When you invest all your funds in just one market instrument alone, you expose your portfolio to higher market losses. When you diversify your portfolio, you counterbalance the risk and loss by investing in other assets which are likely to perform better and deliver better returns. As a rule, always ensure that your investment decisions are based on reliable stock market advice.
Investors who had diversified their portfolio by having substantial holdings in gold and debt instruments were not as hurt by the market crash that took place in March 2020 when the government declared a lockdown. Gold and debt investments effectively reduced the accompanying loss and risk in their portfolios.
3. Being impatient:
New investors often fall prey to get-rich-quick schemes or naively believe that they will become millionaires overnight. The truth is far from it. Investing is a life-long habit that requires one to be disciplined, patient and calm temperament when market volatility plays havoc with your portfolio. New entrants who think that they can take on the swings and volatility of the markets in a DIY investing spirit are headed straight for disaster.
4. Ignoring your risk appetite:
When you invest funds that you cannot afford to risk, your investment strategy suddenly takes a turn for the worst. Heightened emotions and raw nerves force your mind into a corner during a downturn by projecting negative loss-bearing future scenarios. At such times, you must have a cool mind which focuses on the higher returns you can earn in the future by weathering temporary volatility. This will be possible only if you can stand to see your investment amount reducing substantially, and still opt to remain invested.
To avoid the aforementioned mistakes, it is recommended to take the help of a financial advisor in making your investment decisions. This saves one from many pitfalls and the fee is nominal in comparison to the benefits advisory brings to the table.
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