3 investment mistakes to avoid

There are several approaches to investing one can take. And there can be many of these approaches that can be right. Not necessarily the ones with maximum returns, but the ones which fit your objectives. It can be maximization of returns (but with capacity to take risk), capital protection, diversify and so on.

Yet we make mistakes. Almost everyone does at some point of time or other. And many times. However, some mistakes are more common than others.

investment mistakes to avoid

Based upon my observations, here are the most common mistakes that investors make:

1. Too much debt in life

These people typically correlate affordability of things to access to loans & availability of EMIs. EMIs can come in different shapes and sizes. It can be 10% car loan, 12% personal loan, 14% consumer loan or 36% credit card debt! And before you realize. you are in a debt trap. Many of these people may though, not stop SIPs in stock market, because “stock markets give 15% assured returns in long run”, they have been told.

2. Lack of risk management

There can be 2 broad parts to risk management – being sufficiently insured and having a handy contingency fund which can be used whenever the need be. A life insurance (ideally a basic term plan) and a health insurance are bare minimum you need to start with. A contingency fund worth 6 months of your expenses is also something you shouldn’t be ignoring.

3. Lack of diversification

If you are looking at investments and have all your investment parked in a single asset – say real estate (Which you probably bought on EMI) or equities or bank FDs, you may need to rethink the allocations. You may end up getting windfall returns (and if you do this consistently, you are a genius and are not eligible for having this as “investment mistake”. You may also end up underperforming severely. While different people can come up with different rules for allocation, you need to consider them as mere guidelines and not any golden rule. You need go with what are your objectives and what is your risk profile.

Bonus – Lack of any planning related to investing – Depending upon your perspective you may consider investment planning as a prerequisite or lack of it as a mistake. But yes, you need to have a plan. At least a semblance of it. And it is important to have that to get started!

What do you think are the most common investment mistakes and how can you avoid them?

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Originally published here

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