Instead of making guesses about upswings and bad turns, it is a good idea to smooth out volatility by investing in equities regularly, irrespective of the market movement.
One cannot avoid mistakes in life however, clever may be. The same is true in investing. With all the past data and advances in technology combined with experience, no one will get continuous gain while investing all the time. This is majorly because investing is an emotional endeavour as the money you are investing is the dividend of years of hard work.
In this article, we will discuss some of common mistakes investors should avoid.
Avoid timing the market
This is a strategy wherein one invests the money when the market is on the upswing, and pull it out when market is about to take a bad turn. Trying to time the stock market is always tempting, and majority of the times it is difficult to predict about the bad turn.
Instead of making guesses about upswings and bad turns, it is a good idea to smooth out volatility by investing in the market regularly, irrespective of the market movement. If an investor is not comfortable in investing directly in equities, then he should look for systematic investment plans of mutual funds. Investing every month ensures that one is invested during the highs and the lows. As the investment amount is fixed, more shares are purchased when the markets are down, and fewer units are purchased when the markets move up.
No emotional decisions
Investing is a combination of science and art and thus successful investing should have the elements of both. Your emotions are one of the strongest influences affecting your investment decisions. Emotions could often set aside important factors in the investment decision process such as logical reasoning and common-sense. Every investor should understand that their investment decisions have both a financial and emotional impact.
Avoid holding on loss making stocks
This is the very common practice among investors. Many of you think that at the time when you bought and it lost value now. Since, you think, it was a good investment and strongly believe that it will rebound and once when it rebound / breakeven, you will sell. This is the wrong attitude. If the investor were to sell it at a loss they need to admit that they made a bad decision. And admitting this is very difficult for some people. It is best to cut your losses and move on.
Be patient and perseverant
Investing requires good amount of patience and perseverance. Most of the investors think that stock market provide good return in a short span of time. Therefore, assuming that an investor have picked up a right multibagger stock, to maximize its return he needs to hold it through several months.
Do not focus too much on past data
When selecting a share, do not focus too much on past returns/data. Because, the money that you pay is for the future performance of the company and not for its past performance. Essentially, one should focus on how the segment in which the company belongs is going to perform in the near future. Within the segment what is the prospects for the company that you plan to buy.
Stay away from the crowd
Often many investors buy shares when everybody else is buying, and sell when everybody sells. This means that buy at the top of the market, when shares are expensive, and sell at the bottom, when prices have tumbled. This is a formula for losing money. You should look out for companies that are temporarily unloved, so that you can buy those shares at a discount to their intrinsic value.
To conclude that these are the most common mistakes which investors indulge not only in India but across the globe. Having known the same, you could avoid the same while investing.
P Saravanan is professor & dean, School of Commerce and Business Management, Central University of Tamil Nadu, Thiruvarur