Brexit? Trump? Demonetization? Who do you hold guilty for bursting your financial bubble in 2016? The stock market fetched only about 2% returns year-on-year and the truth is that these factors did have a role to play in disappointing you.
Brexit? Trump? Demonetization? Who do you hold guilty for bursting your financial bubble in 2016? The stock market fetched only about 2% returns year-on-year and the truth is that these factors did have a role to play in disappointing you. However, what the financial experts say is that your mind set and financial habits have a larger role to play than market factors in determining your financial health. So why don’t we stop lamenting macro factors which we have no control over and focus on identifying and correcting our own habits? After all, a fresh year calls for a fresh start.
Through this article, let’s look at five common bad investment habits that we should change in 2017.
1. Mixing insurance with investment
Insurance and investment serve different purposes and it’s a mistake to pick one of the two to serve both purposes. Insurance takes care of family needs in case of any eventuality when there is no source of income. Investment on the other hand is meant to build wealth for future in order to meet requirements for marriage, higher education, life post-retirement, etc.
A few years earlier, a product called Unit Linked Insurance Plan (ULIP) was launched which claimed to provide both insurance as well as returns based on the market performance. However, investors did not like the high management fees in the product, along with the fact that it didn’t provide adequate insurance. The wise thing to do is to avoid mixing the two. Try mutual fund SIPs, PPF, equity, gold, real estate etc. to meet your investing needs.
2. Not diversifying investment
Different investment assets have different potential for returns and risk profiles. A high-yielding instrument comes with high risk. So you cannot afford to put all your money in such an instrument as you may lose most of it if the market crashes. On the other hand, if you put all your money into risk-free instruments such as bank deposits, your effective returns are likely to be low especially due to the impact of inflation.
Investors sometimes put most of their money into one asset going by the profits it made in a bull market. Any crash in the market will wipe out their savings in no time. The best strategy is to invest in a set of assets with different risk profiles so that you don’t take too much risk and do not miss out on opportunities to make good returns. A rule of thumb is to subtract your age from 80 (or 100) and invest that percentage of your savings into equities and rest in debt, bank deposits, PPF etc.
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3. Not having separate plans for short, medium , and long-term goals
Most investors do not make time-oriented goals. A portfolio targeted towards meeting long-term goals such as retirement is supposed to look different from a portfolio meant for fulfilling short-term goals such as purchasing a car. For a long-term goal, a substantial part of the portfolio must be invested in equities and equity mutual funds. Liquid funds and short-term deposits work better for meeting short-term goals. For medium-term goals, a combination of equities and debts or balanced funds works best coupled with investment in gold or precious metals.
4. Failing to do tax planning
Tax planning should not be taken lightly and should not be left for the end of the year. It needs to be an ongoing process through the year in which you continually invest in order to save tax. Also, do consider the impact of taxation on your investments. For example, if you are in the 30% tax bracket, your post-tax returns on a fixed deposit earning 7% would be 4.9%. By making these calculations early, you would be able to invest in a better class of investments which would help you generate higher and more tax-efficient returns.
5. Not sticking to a plan
To get it right, it’s important to have a proper financial plan in place and to stick to it. People often drift from their plans when they see one particular asset outperforming the other or just because the crowd moves towards a certain asset. Not getting carried away, not frequently redeeming your investments, remaining invested to earn compounded returns … these are important to avoid any disruptions to your wealth creation.
(The author is CEO, BankBazaar)