Strangely, when we leave school, we have a fair amount of knowledge in math, history, geography, science, languages and what not. But when it comes to money, we are left on our own. It is our family, friends, books, magazines, television channels and the Internet that contribute to our financial upbringing.
Hence, we grow up learning about money in a highly unstructured manner; the end result is generally a poor understanding of it.
As such, when it comes to investing, we all make some mistakes. Here are five common ones.
I don't have the time!
Not investing time is a big mistake. A vast majority of us tend to invest money on hearsay.
A suggestion from the broker, a hot tip from a friend, the discussion at last week's party, the positive recommendation from a financial newspaper/ magazine/ Web site, and so on and so forth are what investments are based on.
The sad part is that most do not devote even a little bit of time and effort before investing to check:
1. Whether the credentials of the investment opportunity are really as good as stated.
2. More importantly, does the investment suit our profile or not?
We, therefore, need to do some homework to avoid any fraudulent investment and ensure that it is suited to our needs and risk profile.
I like a fat bank balance
We may have a good amount of money in a bank fixed deposit. Yet, when it comes to buying a television or a bike, we go for a loan. There is a psychological comfort in having a bank balance. The debt does not register any serious concern in our mind.
This, however, is false comfort and definitely a very foolish thing to do. How much do you usually earn on your fixed deposits -- 6% or 7% maybe even 8%, and that too taxable?
As against this, the interest on a loan could vary from anywhere between 12% and 15%, or even more. Therefore, it makes no sense to have such loans and investments running side by side. Of course, the only exception being a home loan, whose effective cost is usually quite low.
To make ones' investments worthwhile, first of all you must pay off all your high interest loans as soon as possible.
Insurance is an investment
When you talk to people about their investments, they speak about insurance too. Many function under this very common misconception.
Insurance is a cost. It is not an investment.
When we buy an insurance policy (term, endowment, money back, Unit Linked Insurance Plan), insurance companies first deduct a part of the premium towards various expenses.
Then, a portion of the premium is deducted towards providing us the risk cover.
Whatever remains after all these deductions gets invested to provide us returns. Since all these investment options are very safe (except in ULIP with an equity exposure), hence the returns are very low.
So the effective return from an insurance policy is hardly anything to speak about. Therefore, please remember, insurance is NOT an investment.
Just follow the herd
We have seen a classic example of this irrational investor behaviour in the last few weeks.
Till the first week of May, we witnessed an unprecedented one-way rise in the stock market for almost six months.
Valuations were stretched. Experts were advising caution. But people had forgotten that markets do fall. So they kept buying.
Why?
They were afraid that if they did not buy today, the prices would go up tomorrow and they would have missed out. It was a case of panic buying.
Then we saw a market crash.
The Sensex fell almost 1500-1600 points.
Now, people were selling as if there was no tomorrow.
Fundamentally, the economy still looks pretty solid. The expectation of corporate growth is promising. So there is no reason to believe that the shares have lost their basic value. This is just panic selling.
If we look at our investments from the fundamental perspective, we will not buy when everyone is buying and the market is over-valued. Similarly, we will not sell just because everyone is selling.
I only invest in penny stocks
Most investors prefer to buy a stock whose price is low -- preferably below, say, Rs 50. The so-called penny stocks are 'supposedly' available cheap.
There is a feeling that it is easier for a Rs 50 stock to double to Rs 100, than, say, for Infosys to double from Rs 3,000 to Rs 6,000. Undoubtedly true. But there is a catch.
More often than not, these penny stocks are manipulated. They do not have a sound business model to support their price. Thus, while it is easy for the stock to double, it is equally easy for it to halve to Rs 25 or even go lower.
However, would really be quite difficult for the Infosys stock to halve to Rs 1,500.
Moreover, if a penny stock is being manipulated, you might find it easy to buy them. But, when it comes to selling, you could experience great difficulty. There would be no buyers and your price would keep getting hammered.
Therefore, for long-term, consistent success in a stock market, buy 'value' not 'price'.
There is lot to learn from these mistakes. If avoided, you can be reasonably sure to build considerable wealth.
Are you prone to certain investment mishaps? Have you ever made an investment mistake? Why don't you share your experience with us.
Sanjay Matai has more than 18 years of experience in the area of corporate finance and investment advising. He is Executive Director, Infra Solutions (I) Pvt Ltd, a company specialising in infrastructure development and financing.