tock market is a system which transfers money from investors who are fearful and greedy to the investors who are balanced and rational.
Right from one can earn quick money from stock markets to fixed deposits are safe and best, here are few common myths that investors must avoid.
Too young to plan for retirement
Have you started planning for your retirement? You may be saying ‘who me? I am too young to be thinking about retirement”. It is not so! Rethink. If you were smart, and planned for retirement when you are young, your retirement years will be really those golden years.
Fixed deposits are safe and best
They are really safe and it gives us fixed return. But there is no meaning in investing all your money in FD. The post tax return of an FD will hardly beat inflation. If your investments are not beating inflation, then your money is losing its purchasing power. FDs are safe but not always the best option.
Not good in investments
You don’t need a super brain for making investment decisions. You only need common sense and discipline. If you don’t have enough time and expertise, then you can get assistance from professional financial planners.
Stock markets can earn quick money
This is a common myth among investors. Stock market will reward the long term investors. Stock market is a system which transfers money from investors who are fearful and greedy to the investors who are balanced and rational. You need to be calm, patient, disciplined, and rational. You don’t have to be smarter than the rest; you have to be more disciplined than the rest.
Timing the market is important
Investors often spend a lot of their time in trying to identify when the market is very low or high, and timing the purchase and sale of investments accordingly. In other words, they want to time their exit when the market has reached its top and to time their entry when the market has reached a bottom. This not a practical idea because there are so many influencing factors to the stock market. Predicting all the factors and making investments is practically not possible. Instead of that stagger your investments through SIP, STP and stay invested for long term.
Too much diversification
Diversification is needed. A well diversified portfolio can be created with 10 stocks or three mutual funds. Having more than 20 stocks or six mutual funds can dilute your returns. The reason is you are not only investing in best stocks and funds, you are investing in above average and average stocks and funds. So your returns will come down. Instead of over diversification, you need to concentrate on a few stocks.
Investing in what is hot
If you are investing in what is hot, then you are following the crowd. If you follow the crowd, you will get what others are getting. You will not get anything more. You need to be fearful when others are greedy and you need to be greedy when others are fearful. So don’t go by the market trend or the hot pick of the month. Think like a contrarian and follow value investing.
Objective of investment is to save tax
There is a group of people who invest just to save taxes. They will not bother to invest anything more than that. They will meet their objective of saving tax. There is another group which invests to save tax as well as to save for their other life goals like retirement, children’s future. They will meet the objective of saving tax and achieving other life goals.
Ramalingam K is director & chief financial planner, Holistic Investment Planners Extracted from Tax Guru