Equity investment has always been a risky proposition. Investors, however, lose money in stock markets more because of their own mistakes, rather than any market turmoil and other such things.
It has generally been observed, for instance, that many investors lose money in stock markets due to their inability to control fear and greed.
They also keep looking for tips and often resort to speculation, which is not in any way a good investment strategy.
Here we take a look at 8 common mistakes which stock market investors usually make in a bid to maximize their gains:
- Timing The Market
One thing that the world’s greatest investor Warren Buffett doesn’t do is try to time the stock market, although he does have a very strong view on the price levels appropriate to individual shares.
A majority of investors, however, do just the opposite, something that financial planners have always been warning them to avoid, and thus lose their hard-earned money in the process.
For market timing to be an effective investment strategy, “you need to have a 70 per cent accuracy rate or better,” says global financial expert Ted Cadsby.
That is what makes it virtually impossible. But, sadly, a good number of investors are yet to see any merit in Cadsby’s advice. - Following Herd Mentality
Following herd mentality is another reason for the investors’ losses. “It has been witnessed that the typical buyer’s decision is heavily influenced by the actions of his acquaintances, neighbours or relatives. So, if everybody around is investing in a particular stock, the tendency for potential investors is to do the same. But this strategy may backfire in the long run,” says Ashish Kapur, CEO, Invest Shoppe India Ltd. - Too Much Relying On Tips
Too much relying on tips or on even educated professionals in a public forum (like TV channels) is another big error that people make. No expert can profess what every individual who is hearing the channel needs to follow. “Beware of the glib helper who fills your head with fantasies while he fills his pockets with fees,” warns Warren Buffett.
“You should, therefore, never invest on recommendations alone. Instead always have proper analysis before investing,” advises Sameer Bhargava, Regional V-P – North, Principal PNB Asset Management Company. If you are unable to do that, you can take the help of a qualified financial planner. - Putting All Eggs In One Basket
Think of the old saying, “Don’t put all your eggs in one basket”. However, another mistake which investors generally make is non-diversification of their portfolio.
They generally put all their money in limited and favourite stocks which are in momentum, and thus also increase the chance of losing their money in case of any market turmoil. This explains why investors should diversify their portfolio across industries and size of the companies.
“There are two primary reasons to diversify your portfolio- one is to take maximum advantage of the market conditions and the other is to protect yourself against downturns. The basic concept is to divide your investments amongst asset classes where the returns made are inversely proportional to each other,” says Lovaii Navlakhi, MD & Chief Financial Planner of the Bangalore-based International Money Matters. - Being Guided By Fear & Greed
Many investors have been losing money in stock markets due to their inability to control fear and greed. In a bull market, for instance, the lure of quick wealth is difficult to resist.
Greed augments when investors hear stories of fabulous returns being made in the stock market in a short period of time.
“This leads them to speculate, buy shares of unknown companies or create heavy positions in the futures segment without really understanding the risks involved,” says Kapur.
Instead of creating wealth, such investors thus burn their fingers very badly the moment the sentiment in the market reverses. In a bear market, on the other hand, investors panic and sell their shares at rock bottom prices, thus losing money again. - Lack Of Research
Proper research should always be undertaken before investing in stocks. But that is rarely done. Investors generally go by the name of a company or the industry they belong to. But this is not the right way of putting one’s money into the stock market. “Therefore, if one doesn’t have time or temperament for studying the markets, one should always take the help of a suitable financial advisor,” advises Kapur. - Investing Without Patience & Discipline
Historically it has been witnessed that even a great bull runs have shown bouts of panic moments. The volatility witnessed in the markets has inevitably made investors lose money despite the great bull run.
The investors who put in money systematically, in the right shares and held on to their investments patiently can generate outstanding returns. Hence, it is prudent to have patience besides keeping a long-term broad picture in mind. - Having Unrealistic Expectations
There’s nothing wrong with hoping for the ‘best’ from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions.
For instance, lots of stocks have generated more than 50 per cent returns during the great bull run of recent years. However, it doesn’t mean that you should always expect the same kind of return from the stock markets.
Therefore, when Warren Buffett says that earning more than 12 per cent in stock is pure dumb luck and you laugh at it, you’re surely inviting trouble for yourself.
Source:economictimes.com
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