Making mistakes is something that is unavoidable in human life. Everybody makes mistakes, and you cannot get away with making them. But what really makes a difference is your response to your mistakes. You can either repeat your mistakes or learn a lesson from them. Repeating mistakes will lead to failure, but learning from them is the key to success.
While doing my personal financial management, I have made numerous bad decisions and learned great lessons along the way. I have lost time. I also missed the compounding gains of those times. However, my corrective actions resulted in a recoupment of my losses and better returns later in life.
Here is the list of my financial mistakes and lessons:
1. Combining risk and return managers: Most of us would have invested in Unit Linked Insurance Plans (ULIPs) by getting attracted to their propositions of 80C benefits along with insurance coverage and a good return. ULIP plans, which are generally quite expensive due to multiple charges such as premium allocation charges, fund management charges, mortality charges, and so on, did not produce good returns because a large portion of my investments went to pay off these expenses and only the remainder was invested. I was disappointed with the low returns and the trap of only being able to withdraw the money after 5 years to avoid an early surrender charge. The same was true for traditional insurance (endowment) policies.
The lesson I learned was to always keep the return manager and risk manager separate. As a result, for risk coverage, I chose a pure term plan and pure equity mutual funds for returns.
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2. Intraday derivatives trading: Greed only leads you to a bottomless pit. In an attempt to make large sums of money in a short period of time, I (and perhaps you as well) began doing intraday trading on tips and suggestions provided by so-called stock market “gurus.” I embarked on futures and options trading, lured by its profit potential. At first, I did make some money, but when I upped my wager, I suffered a sizable, non-recoverable loss.
My lesson was that trying to make a quick buck always results in financial loss. There are no short cuts, and we shouldn’t use leverage to gamble in the short term. We should only invest in the equity asset class for the long term.
3. Poor tax planning: Another important lesson I learned too late was the importance of proper tax planning. For example, taking advantage of all tax deductions like 80C, 80D, the National Pension System (NPS), home loan interest, etc. was far from my mind. I did not even set off my capital loss with the capital gains from trading in subsequent years.
I learned that money saved is money earned. Small savings add up to large sums of money over time.
4. Investing in newly launched, highly marketed products like NFOs, IPOs, etc. The noise about new products in the newspaper, on TV, etc. compelled me to invest in too many New Fund Offer (NFO) mutual funds and initial public offerings (IPOs) without doing diligent research. Even my friends pushed me towards a few investment products because they too were investing in them. All these scattered my investments across too many investment and financial products, and I started struggling to manage my portfolio.
My lesson was to only invest in limited schemes with a proven track record after conducting thorough research. Also, investing in a random way can hurt the return on your portfolio as a whole.
A few more lessons I have learned through my investing journey are listed below.
a. Make investments based on your financial objectives and time frame. First, identify the asset class to invest in and then the product that falls under it.
b. Strictly avoid adding unwanted investments to the portfolio solely for the sake of obligation. Say no to the investment recommendations of your closest friends and family.
c. Invest as soon as possible, without wasting time, in the right product. It helps you use the power of compounding to your advantage.
d. Invest only in strategies you understand.
e. Always choose an investment product after the tax has been adjusted. This entails assessing investments in light of the post-tax return.
f. Asset allocation is the key to making the best risk adjusted return.
Since time is the best friend of an investor, my goal in sharing my mistakes with you is to help you avoid making the same ones.
(By Akhil Bharadwaj, Senior Consultant, Alpha Capital)
Disclaimer: This is the personal opinion of the author. Readers are advised to consult their financial planner before making any investment.