Globally, basic investing principles are not only simple, but also indisputable. If followed religiously, success in the long run is inevitable. Investors, however, tend to forget these principles and end up paying a heavy price eventually. Securities market movements can be extreme and brutal, that make us react forgetting all principles, which leads to making grave investing mistakes. The same is true for the last year too. From 30% returns in equities over 12 months to a 10% drop in a month made many investors commit these mistakes. Here are a few investment mistakes noticed in the last couple of years or so which actually reminded investors that fundamentals exist and should never be ignored:
1. Investing in cryptocurrency
A crytocurrency is a digital currency that is created and managed through the use of advanced encryption techniques known as cryptography. Cryptocurrency gained fame and recognition as an investment class after the creation of Bitcoin in 2009. Bitcoin slowly started attracting lots of eyeballs as the price started rising sharply giving multi-fold returns. It reached an unimaginable level in April 2013 when it captured significant investor and media attention as it peaked record US$ 250 per Bitcoin after surging 500 fold in a matter of 5 years.
“Bitcoin thereafter never lost the limelight and went on to score another unbelievable 70-fold return from its 2013 peak to around US $20,000 per Bitcoin in December 2017. Obviously Newton’s law kicked in and it couldn’t sustain those levels. It came slashing down from its peak and plunged 50% in around a month’s time, thereafter creating a raging debate about the future of cryptocurrencies in general and Bitcoin in particular. This proved that investing in cryptocurrency is gambling and not an investment. Baring a handful, none understand crytocurrencies 100%,” says Abhinav Angirish, Founder, investonline.in.
2. Investing in red hot equity stock without research
Whether the tip comes from your family, your friends or even your unknown train companion, you should know that if you bet on it, it is as good as playing roulette. At least roulette releases your anxiety in a matter of seconds! It is not that short-term traders do not make money on equities, but note that they are seasoned and trained professional and know to cut their losses if need be.
“If you are not one, it is best to stay away from short-term trading. When you make an investment, it’s important to know the reason behind the investment. Typically, small cap stocks catch one’s attention. Small cap stocks generally have low volumes and very few investors which make it easy for a stock to move either way on very low volumes and few trades. In the last calendar year, small cap index rose over 54%. Typically, investors enter these scrips close to their peak and end up with them in their demat accounts…. probably forever as it never sees the purchase price again,” says Angirish.
Similarly, many of these scrips wiped out most of their returns of the year in the last couple of months alone. This does not mean that there aren’t fundamental small cap scrips. There are and one can make serious returns over the long run, provided they are well researched.
3. Mixing insurance with investment
The main objective of buying life insurance is to provide replacement income to one’s dependents in the event of one’s unfortunate demise. Ideally, your life insurance policies should cover at least 10-15 times of annual income. However, most investors tend to mix insurance with investment, leading them to invest in sub-optimal insurance schemes offering very little in terms of both life cover and returns.
“Investors should instead segregate insurance and investment by buying term insurance plan(s) for getting higher life cover at lower premium; and invest in direct plans of mutual fund schemes for generating higher returns at lower cost and with high liquidity. Also, while term insurance plans too will help save taxes under Section 80C, those having greater scope of saving taxes under this Section should consider Equity Linked Savings Schemes. These are tax-saving mutual fund schemes with lock-in period of just 3 years, lowest among all tax saving investment schemes available under Section 80C,” says Naveen Kukreja, CEO & Co-founder, Paisabazaar.com.
4. Investing without identifying financial goals
A financial goal is a monetary representation of one’s life goals. Without financial goals in place, one will not have a clear direction of how much to save and invest for achieving his various life goals. In addition to this, setting financial goals help in instilling financial discipline and devising an optimum asset allocation strategy based on your risk appetite and time horizon of life goals. For example, as equities can be very volatile in the short term, those with low risk appetite can avoid investing in equity mutual funds for realizing their short-term goals.
5. Waiting for more money to invest
Early earners or those with lower savings rate generally postpone their investments till they accumulate a sizeable corpus in their bank account. However, delaying investments may come with a significant opportunity cost due to the power of compounding. “With compounding, one makes money on the gains or interest earned on the original investment, eventually leading to a much bigger corpus in the long term. Hence, instead of delaying investments, one should build the habit of regular investing for financial goals through mutual fund SIPs. One can invest in mutual funds through SIP for as low as Rs 500 per month. This will also help in averaging cost of investments during market dips and corrections,” says Kukreja.