Whether you are a novice investor or an experienced one in the stock market, investment mistakes are something that any investor can incur. Due to making the same mistakes over time and again, many investors lose all the capital they have invested in the market and finally leave the market. However, if you know the mistakes, you won’t make them, isn’t it and it can help you invest wisely and help your investment grow and generate better returns.
In this article, you will find the top five crucial investment mistakes that ruin most investors and don’t let them be successful and wealthy.
No investment goals or unclear investment goals:
Investments are something you do for future goals. It can be buying a house, funding your business, buying a car or your child’s higher education, planning retirement, and many other financial aspirations. Investment goals help you understand how long you have to invest, how much you have to invest, and the level of risk you should take to achieve the wealth you need to fulfill the investment goal.
Now, if you don’t have an investment goal or even more dangerous if you have an unclear investment goal, you don’t know where or how much to invest, which can lead to a complete massacre. Suppose you want to buy a car in the next 3 years.
For this financial aspiration, you need to invest in some small-cap or mid-cap companies that can offer you higher returns and thus accumulate the amount within three years to buy your dream car, but small-cap investments are riskier. Here as you have a clear vision of what you want, it’s easier to pick the right asset for investment.
Little or no knowledge about the market:
Many people want to invest in the stock market or other assets just because their friends, family members, or colleagues are doing it. It is another dangerous thing to do if you want to accumulate wealth for your future and become a successful investor.
Taking a cue from the above example, suppose, instead of investing in small-cap or mid-cap funds, you invested in large-cap securities or large-cap funds, which provide average return but provide stability of return generation and income.
Thus, the large-cap investment cannot help you accumulate the amount you need in the next three years. So, even if you have a clear investment goal, a lack of knowledge about where and how much to invest can ruin everything.
Putting all the eggs in one basket:
The 3rd investment mistake to avoid is not diversifying your portfolio enough. A simple daily-life example can be putting all the eggs in one basket; if the basket falls, all the eggs will break.
This signifies the importance of diversifying your portfolio with different assets so that if one sector performs sluggishly, investments from other sectors or classes can balance it with good performance.
For instance, if you invest in stocks and the market goes down, it can bring down your portfolio value and leads to losses. However, if you have gold in your portfolio, which increases in price when the stock market crashes, it can balance the performance of your portfolio. So, choosing the right investment and using them to mitigate the risk of investment is crucial for every investor.
Buying high selling low:
Most investors invest and redeem their investments out of fear or greed, which is the most crucial investment mistake. When the market is going up, due to greed, many investors enter the market and buy assets.
This time price of stocks and other securities are on the higher end. Now when the market starts falling, these investors, out of fear, starts selling their investments at low price.
So, what else can you expect other than losing all your capital if you buy something at a higher price and sell them for a penny? This happens because of the lack of research to understand security and invest in it. When investing, you need to be aware of how the assets in your portfolio will perform in the next few years and then take a call.
No periodic rebalancing of portfolio:
Finally, one of the biggest investment mistakes is not rebalancing your portfolio from time to time. Suppose you have a 60% investment in equities. However, for the past 2 years, the equity market rallied, and eventually, the value of your equity investment went up.
This has changed your portfolio’s asset allocation as per your investment goals and risk appetite. Thus, you need to rebalance the same to align your investment profile with your goals and risk profile.
With clear investment goals and adequate market knowledge, you can pick the best investment options. While showing no emotion in investments or trading can help you minimize your losses and also help you grow your wealth over time. Finally, you need to keep an eye on your investments’ performance and asset allocation to rebalance your portfolio whenever required.