The biggest nightmare that an investor faces is the loss of capital or negative returns in an investment.
None of us like to lose our hard-earned money. Yet many times investors tend to invest in instruments that end up giving negative returns. Investment is not a simple thing for sure but what is definitely simple is to lose money.
In this article, we are listing the 5 easiest ways by which one can lose money.
Investment is quite different from trading. In trading people buy and sell investments with a short period (a few months to 1 year), their primary objective is to make short-term gains and exit the market. This approach can lead to loss as well since markets are volatile.
Many a time various advisers/distributors and people suggesting on investment advice that if you have made a higher return in the short period book the profit and leave but one has to understand that 12% for 5 years is far better than 20% in one single year.
Investment has to do a lot with behavioral finance where one has to avoid trying to get rich too soon. Investment is a long-term proposition and sees many upsides as well as downsides, as an investor one has to be aware of it and embrace the same.
The stock market will be volatile, the interest rate will move up and down, economic conditions will keep on changing and many such factors will keep on impacting an investor’s portfolio but having patience is the key for a prudent investor, unless he is keen on losing the money.
2. Not understanding the market
Indian stock markets are dependent on a lot of factors like the economic state of the country, political situation, world economy and trade relations, sentiments, liquidity, and various other fundamental factors.
One has to have a basic understanding of the functioning of the market, risks involved, and be able to embrace the volatility. Most people try to time the market whereas the fact is that the market always rewards for the risk that one takes and the time that one spends in the market.
As an investor one has to stay away from the misleading news that is very prevalent in the market.
3. Investing on the basis of trust and tips rather than analyzing facts
Many times as an investor you will come across people who are excellent orators, salesman, or are having good knowledge. We have seen a majority of people investing just on the advice of such people without even understanding or doing any research of their own.
Yes, trust is important but equally if not more important is to understand and analyze the facts and invest according to your needs. Understanding the key elements of investment like risks, return parameters, volatility measure of investments, and costs involved in the investment is very important.
Awareness regarding these indicators helps an investor in understanding the overall construct of the investment products and enables them to make informed decisions.
4. Panic due to short-term volatility
The basic understanding of an investor is that the stock markets are inherently volatile. This can be due to the fact that either they are aware or informed or have experienced such volatility. This volatility can be attributed to the uncertainty in the economy and various other variables that keep on changing but even the debt bonds have a decent amount of risk.
Usually, an investor’s expectation, once he starts investing is that the market should go up and hence his investment but that is not the case always. Instead, since the markets are volatile the value of investments keeps on changing, and once an investor sees a negative return he starts to panic and many times takes drastic steps.
As a prudent investor it’s very important to be aware of the volatility of the markets (equity and debt) in general and how does the specific product that he is investing in draws its volatility. One has to enter only when one has a clear goal be it long or short term and is aware of the volatility because of uncertainty.
Hence should be prepared to be able to cope up with it and not to get jittery and take actions in panic which could be detrimental in the long run.
5. Not sticking to basics
Investment is a long-term commitment. One has to structure the overall approach to investment aim towards creating a portfolio covering the broader objectives and goals.
One of the major mistakes that many investors do is to look for the products that are prevalent in the market or some exotic investment options like any current NFO (New fund Offer) which is highly marketed by the fund houses.
Often there are some investment products carrying high commissions for the distributor which is aggressively pushed to the investor but one has to understand that one has to keep the basics right.
Asset allocation is one such thing.
Ideally one has to stick to his/her asset allocation and should be able to quantify the risks in the portfolio and understand the risks involved in the products so as to suit their risk appetite and should fit into the overall portfolio.
The ultimate aim of an investor after they have decided upon the risk appetite, goals, asset allocation is to make a buying process for the portfolio and hence stay away from product-based approach and the products that are not suitable for them.