Given the gaining importance of financial markets in our daily lives as well as in our efforts to build capital for future security, it would be a good idea to look at 10 bad financial habits which one should resolve to stay away from.
The Dussehra festival derives its name from the Sanskrit term Dassa Hara or removal of 10 evils from your life. Given the gaining importance of financial markets in our daily lives as well as in our efforts to build capital for future security, it would be a good idea to look at 10 bad financial habits which one should resolve to stay away from this Dussehra:
1. Investing without a plan in place
A financial plan is a must before you start your journey in the financial markets. It is imperative to have a road map of where you wish to reach and how you want to go about fulfilling your dreams. A proper tabulation of income, expenses and savings is a must for you to stay focused and not get derailed during volatile times. Hence this is the first and the most important mistake which investors should avoid.
2. Altering your asset allocation
A proper asset allocation plan is derived from the financial plan. During extreme bullish or bearish times it is often very tempting to alter these allocations due to fear or greed. This is another big mistake which investors should stay away from.
3. Regular Monitoring and rebalancing of portfolios not done
Once the allocation between different asset classes has been made, it is equally important to keep reviewing the performance of various instruments or plans invested in. Since different asset classes move in different trajectories, a regular rebalancing is a must keep the initial asset allocation in place.
4. Borrowing money to invest
Leveraged investing is the biggest single reason for investors to suffer big losses whenever the trend in any asset class reverses. So simply take a vow to always resist the temptation to buy any asset on borrowed money. This is particularly relevant for the stock markets where leverage is very easily available in the futures and options segment.
5. Being penny wise and pound foolish
Financial markets are complex and volatile. So unless you have deep knowledge, understanding and time, do not attempt to wade into them on your own. Many investors shirk from the fees which advisors charge and in trying to save some pennies lose their entire savings.
6. Ignorance about financial markets and various instruments of investments
While taking help of financial advisors is both desirable and necessary, it does not take away the importance of having some basic knowledge about financial markets. Investors well versed with capital markets are always at an advantage while dealing with their advisors and are generally able to secure a better deal from them. There are various online and offline courses available for securing a basic knowledge about capital markets.
7. Getting swayed by rumours and exaggerated hype and fears
India is fortunately a very big, stable and well managed economy. Hence the extreme projections and statements rarely work out. In bull markets you will hear exaggerated claims of profit growth and prosperity. In bear markets you will only hear about doom and gloom. Neither of the two scenarios usually play out. So, investors have to learn to ignore outlandish remarks and predictions.
8. Relying on tips
This is mainly the bane of bull market in equities. Tips from unknown sources start generating fabulous returns. Do not rely solely on tips and do your own research or take proper advise before buying any stock.
9. Ignoring risk
This is a major issue with investors in our country because of the legacy of assured, government-backed returns. Risk assessment should be an integral and important part of any investment decision.
10. Ignoring Tax impact
Whatever returns your investments generate will come to you only after taxes have been settled. Different asset classes and instruments are taxed under different clauses and subjected to different rates. So, in comparing investment options always consider the tax impact also.
Have a happy Dussehra and a great year of investing going forward!
(By Ashish Kapur, CEO, Invest Shoppe India Ltd)