7 Common Investing Myths & Mistakes

To err is human. However, you cannot say this to your children when you do not have enough money for their higher education as you suffered heavy investment losses. While making mistakes is human nature what if you could also avoid those mistakes? You have seen and heard about too many people making stupendous losses and giving up on their financial future. You both venture into the investing world and make the same mistakes or you avoid investing altogether. It is debatable which scenario is worse. What if you did not have to face any of these scenarios? What if you could have a decent investment journey make profits and generate returns on your portfolio? It has been seen that investors often fall into the trap of the various investing myths and render heavy losses during their life’s financial journey. This experience embitters them and they avoid investing altogether. Here is an attempt to debunk some of the common investing mistakes and myths.

All Financial Advisors are the same

First we need to define who a financial adviser is. A financial adviser is an individual who is qualified and/or experienced in the field of finance. The advisor will give you financial advice, assist in making investment and keep an eye on your portfolio and also rebalance as and when required. For all the services provided he or she may charge a fee or may claim 1% or 2% on the total value of the portfolio managed.

There are financial advisors who might only advice you and charge a fee for that. He will then ask you to get his advice executed by someone else, maybe through a mutual fund distributor for buying the mutual fund schemes suggested and the Insurance advisor for the insurance or term plans suggested.

There are other Financial Advisors, like CFPs or SEBI registered financial advisors called RIA (Registered Investment Advisors).

Financial advisers are often confused by brokers who endorse a product because it benefits them and not necessarily the investor. The brokers tend to make profits by selling and buying shares or other products and it has nothing to do with your goals or financial future. They are more into transactions. Buying into such ‘advice’ and not learning to distinguish who a true financial advisor is could fatally affect your investments.

Therefore, your selection of a financial advisor will depend on the scope of financial advice that you are looking for. For example – if you want to invest only in mutual funds then you need to contact an AMFI registered mutual fund advisor and for buying an Insurance policy an IRDA licensed insurance agent or maybe an online platform for buying term plans online. Similarly, for trading in shares you need to contact a SEBI registered share broker or sub broker. However, if you want to have a full financial plan made, then you need to contact a CFP or a planner with adequate experience.

Need to Get Back the Capital. Hence, will Not Sell

This is an egoistic statement to make and you are probably making more losses by following this mantra. You have not withdrawn your investment in a certain stock which is rapidly going down. You are in the illusion that the value of the stock is falling steeply hence, you need to wait for the prices to come back to your buying level. It is time to get a reality check. The stock is going downhill and it is a bad investment. Chances are that you are not going to get your capital back because your capital is in a state of depreciation. Hence, it is time to do damage control and accumulate whatever you can and make a better investment this time. If you let your ego intervene in your investments you will pay heavily for that.

You Need to be a Genius to Gamble in Stock Markets

Stock markets are not for the genius and neither is it a gamble. There are a lot of myths surrounding the stock market. To be able to invest you need to be willing to invest. It is as simple as that. Stock market requires a long term investment horizon and consistency. A little stability in your investments and you will be able to override the volatility. Stock markets are definitely not a place to gamble. A little rests on investing luck but is largely historical performance of stocks and the current market conditions. Often investors give into hypes and markets speculations and these leads to the infamous losses. You need to take decisions based on objective details and not on subjective stances and speculations. So a sane head, a little knowledge, a good financial advisor and some patience and you are good to go.

Little or No Diversification will Get Me Results

You must have heard of the common saying do not put all your eggs on one basket. Avoiding diversification means putting all your investing goals in one asset class. It will put your financial future at risk and at the mercy of one asset class. Debt funds and other traditional forms would give traditional returns leading to a possible underfunding of your goals. Putting all your assets in equities could put your assets at risk as these funds are volatile and risky. Hence, diversification can be used to strike a balance to get the desired returns by taking calculated risk. However over diversification can cause scattered investments and not desired results. It is crucial for you to get the diversification right and keep rebalancing the portfolio to achieve desired results.

Withdrawal without Replenishment

Do you have the habit of taking money out from your investments? You might often be doing under the pretext of an emergency. You assured yourself the amount withdrawn today will be replenished as soon as you have funds. When you actually had the funds it got channelized into other directions and you never went to replenishing the withdrawn amount. This is a fatal investment mistake as it could possibly lead to underfunding of a financial goal that you have set for. The more you delay the replenishment the more you are losing out on the compounding effect. This constant withdrawal also reflects upon your failure to exercise discipline in investing. So while you may often have to withdraw from savings, replenishment should always be your priority.

There is a “Secret” of Investing which Only Experts Know

This myth is often perpetuated to intimidate investors and make investments by keeping them ignorant. There is no secret to investing. All information on all funds and stocks is public knowledge including their historical returns and performance. Hence, there is enough information available in the Asset Management Company’s websites, insurance websites, personal finance blogs or third party websites to help investors make informed decisions. The awareness is crucial on the part of the investor. There is no such secret that a broker knows and you don’t. In case they try to argue or convince otherwise just know you are being scammed. You can always approach a qualified and experienced financial planner to help you make an informed decision. However, do not get intimidated by existence of any secret knowledge because there isn’t any.

I Earn Enough: So Let It Be

Just because you earn enough that does not mean you can always rely on your income and live life from one pay cheque to another. What if you lose your job? What if your income decreases? If you are having a neck to neck existence then you will be in trouble in an emergency. So earning enough is not an excuse to not invest. Investment is often called to be a second source of income because of the compounding effect. So this procrastinating by relying on your present and future income could be fatal for your future. The fact that you earn enough should be more of a motivation to aggressively invest rather spending and waiting for the next pay cheque.

Conclusion

All of us have given advice and also been at the receiving end of advice way too many times than we can count. It is simply human nature to assume we know the best for us and for everyone. However, that is always not the case. We often give in to what others think is best. Some of us may also have invested based on market speculations or given into a hype promising unrealistic returns. To avoid such catastrophes and becoming one of the many stories about financial disasters one always needs to be on a look out. Always trust information which comes straight from the horses’ mouth. Trust your financial advisor but also be aware of your portfolio performance. A little caution, a little knowledge and a good financial advisor could be your key for successful investing life.