Equity investment: 7 mistakes you should avoid to become a successful investor

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Updated: December 11, 2018 3:33:00 PM

In a growing economy, there is no reason that the investments made in the shares of good companies would give you loss, unless you commit the following mistakes.

equity markets, stock markets, equity investment, long-term investment, financial planning, market volatility, power of equity, power of compunding, CAGR, compunt annual growth rate, gambling, economy, economic growth, growing economy, diversification, mutual funds, MFs, financial advice, financial planners, independent financial advisors, IFAs, financial discipline, wealth creationEquity is the only asset class which has a track record of generating wealth by beating inflation comprehensively in the long run.

Equity is the only asset class which has a track record of generating wealth by beating inflation comprehensively in the long run. Apart from inflation efficiency, tax advantages offered by the government add feather to the cap. However, you have to be mentally strong to negotiate the market volatility in the short run to fetch the returns in the long run.

In a growing economy, there is no reason that the investments made in the shares of good companies would give you loss, unless you commit the following mistakes.

1. Investing without planning: Before starting investments, you should know what are your financial goals and how much risks you should take to reach the goals. If there are no other ways to reach a long-term goal without the roller coaster ride of stock markets, you will get into the equity investments with determination. It will help you to ignore the short-term volatility as your your eyes will be set on long-term targets. On the other hand, aimless investments would drive you out of the market during turmoils resulting in booking losses.

2. Equating market investment with gambling: Investing in stocks of a company is not a gambling and you should enter the market with a conviction on the power of equity. For that you first have to believe the economic growth story of the country that there would be no reason for a good company to fail under a growing economy. If you have trust on the economy, you will also have trust on growth of equity markets, which reflects the status of economy in long run. If you remain fearful, thinking that you are involved in gambling, you will not be able to sustain the short-term market volatility.

3. Not taking financial advice: If you are not an experienced investor involved in equity investing and don’t have time and resources to study the markets and companies in which you wish to invest, not seeking help of a financial advisor would be a grave mistake. You need to study the present and past performances of a company and its future prospects along with the prospect of the industry, in which the company belongs, before deciding whether to invest in the company or not. For novice investors, direct entry into stock markets would result into financial loss, causing an equity phobia. Retail investors, who can’t pay a financial planner in lakhs, may take help of an independent financial advisor (IFA) to take mutual fund (MF) route to enter the equity markets.

4. Trying to time the market: It is said that people lose more money by waiting for market corrections than the corrections itself. Moreover, unguided people tend to follow other people and invest at the peak of the market when everyone is investing, which create a bubble. When the bubble bursts leading to market crash, they again follow people who withdraw their money out of fear booking huge losses. So, don’t try to time the market yourself, and to overcome such greed and fear, you should take help of financial advisors. A systematic investment plan (SIP) also helps to minimise the quantum of loss than the loss one may suffer in lump sum investments.

5. Not maintaining financial discipline: If you start an SIP, don’t stop it during market turmoils. In fact, you should invest more when the market is down. So, it’s better to maintain a financial discipline and continue to invest till you reach closer to your financial goal. As you should enter the market with long-term goals, give time to investment to grow. Indulging in short-term investments or daily trading will minimise the chance of gain and maximise the brokerage expenses.

6. Not believing in the power of compounding: The power of compounding has been described as the eight wonder of the world and can only be realised through long-term investments. As the time is the most important factor in the formula of compound interest, longer you stay invested, higher will be the gain. The returns on market index are expressed in compound annual growth rate (CAGR) and has given considerable return in long run, provided you stay invested for long to get the benefit. Entering markets with short-term outlook creates the situation where it is said that while the Sensex generates considerable CAGR, investors fail to get good returns.

7. Putting all the eggs in same basket: Like a rotten egg spoils all the other eggs in a basket, putting all your money in a single stock may wipe out your wealth in case the company in which the investment was made fails. So, diversify your investment and chose at least ten good companies across sectors / industries so that the impact gets lesser in case a company gets bankrupt. If you don’t have enough money to buy expensive stocks of a number of good companies, you may invest through mutual funds, which provides the benefit even with small investment in their diversified portfolios.

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