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Coffee Can Investing

Seven Common Mistakes Of Investment

1.No clear investment objective/plan: 

“If you don’t know where you’re going, you will probably end up in the wrong place”. 

Financial goals should be written and not based on rumors or tips from others.

 

2.Trading too much too often:

Too many people trade too much, and hence do not reap the benefits of long-term investing. Buying and selling stocks continuously might be fun, but what we don’t realise is that repetitive trading leads to lower returns and higher transaction costs.

 

3.Lack of diversification:

As we all know, different classes of assets carry different kinds of risks and return potential.

Diversifying our portfolios can lead us to insulate ourselves from shocks in a particular asset class.

Moreover, adequate diversification is required for long-term wealth creation.

 

4.High commission and fees:

It is very important to choose funds with low fees and commissions, else as we saw with Mr. Talwar, he ended up paying 7% annually in the form of brokerage commissions.

 

5.Chasing Short term Returns:

We should realise that a stock should be purchased on its future expectations and not on what was done in the past. 

Do not be greedy and chase short-term profits.

As with Mr. Talwar and Mr. Sangvhi, both got greedy and actually lost money rather than making wealth.

 

6.Timing the markets:

There is no way one can accurately predict the future. Similarly, there are many indicators that can help us in identifying a trend, but there is no way to know which is the best entry and exit point of every single stock.

Timing the markets is hard and most people lose money in this game rather than making it.

 

7.Ignoring Inflation and Taxes:

Most investors look at nominal figures of their returns and ignore the inflation part. If you made 5% returns but the inflation growth in that year was 8%, it means that you made money, but lost your purchasing power.

In the following image, we can see that Gold has hardly delivered any returns when adjusted for inflation. The initial amount invested was Rs. 1 lakh.

 

 

‘The best time to plant a tree was twenty years ago. The second best time is now.’ -An ancient Chinese saying

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Etee Bajaj

This document is curated by Etee Bajaj. A BBA (HNRS) Graduate from St. Xaviers College, she has also completed her M.Sc.(Finance) and CFA from ICFAI University, Hyderabad. She takes keen interest in stock markets and believes in Value Investing and Fundamental research and considers the storyline of a company a crucial factor in investment. Reading autobiographies of renowned people is her hobby.