Financial Planning Tips: Today is Dussehra and today’s financial investment is a matter of individual choices which depend on the risk appetite and time frame of each individual’s goals. However, it is necessary for every individual to be aware of the common mistakes that should be avoided while investing. Our expert Arvind Kothari, Manager of Smallcase and Founder of Niveshay is giving you some new tips on Financial Planning.
Insure before investing
Nothing is more important than life. Insurance is important as it helps you during financial difficulties and unexpected times. In this age of uncertainty, it is necessary to stay safe from all financial dangers, not only for your own benefit but also for your financial dependents. A health insurance policy should provide adequate medical cover for you and your family members. Term life insurance offers a high sum insured, which will be enough to cover the expenses of your family and maintain the lifestyle that you are providing them.
Investing without a plan is pointless
People invest in different asset classes in the name of investment but sometimes they do not have any plan or strategy. Ships moving with the wind do not take anyone to the port, a direction is needed to reach there. Similarly, it is very important to have a plan or strategy to achieve the financial goals otherwise there is no point in investing. It’s totally pointless.
Avoid favoritism and don’t love your shares
Investing is as much as watering a tree and we often water some trees more than others. It’s just because we love them, we get attached to them. We tend to be biased and pay more attention to them. We keep giving them water when they don’t need it much or they don’t deserve it. At the same time we are wrong because a garden full of flowers cannot be made by paying attention to only a few trees. Here, your portfolio is your garden and stocks are your trees. When you are building a portfolio of stocks, you need to be as rational as possible. You have to treat every company according to its core principles and even avoid showing them love when they don’t perform.
“Things change with changing times” and “Don’t change thoughts with changing times”
If there is some volatility in the market then the whole story of the person changes. With a slight correction in the market, everything starts looking hazy. If there is a bad quarterly performance, we start seeing dead-ends. We must not forget that ups and downs are part of the market. Our outlook should not change from time to time based on market movements, which are temporary. Also, if the stock has not performed in the previous cycle, it does not mean that it will not perform in the next cycle as well. Companies operate in a dynamic business environment. We should make a habit of looking at things from a new perspective.
Having a herd mentality and avoiding pre-preparation
Have you bought this stock? I will buy too. Reflecting on your friend’s or family’s portfolio will not solve your financial problems, but you will only add to it when they are not competent enough to give you any advice. Before making any investment, one should do his/her prior preparation.
no investment deadline
Time is the most important thing in life and in investment too, it is no different. Timing is most important when one wants to achieve financial goals. Wealth creation takes time. People often want to earn money in a quick and easy way which leads them to take undue financial risks. Investments should be made keeping in mind the time frame.
Don’t be trader to investor or investor to trader, stick to one!
If the share price rises, I will sell it quickly but if the same share price falls, I will sit there for years and wait for it to rise. This confused mindset leads to chaos. It’s like selling your winners and keeping your losers. This happens when people don’t have patience or they don’t have any business sense.
Ignoring asset allocation
Having proper asset allocation helps in optimum returns and reduces risk. Asset allocation helps in creating a diversified portfolio comprising of different asset classes like Equity, Debt, Gold, etc. which enables the individual to generate high returns with minimum risk. Even within an asset class, it’s not just choosing the right stock; But it is also about choosing the right quantity which will enable better returns. Not all asset classes move at the same speed or in the same direction, so it is important to have the right mix. A strategically designed portfolio with a long-term outlook helps wealth grow and avoids any excessive downside risk of loss.
Not saving enough and spending recklessly
Warren Buffett says, “Do not save what is left after spending, but spend what is left after saving.” People often do not control their emotions and spend without thinking on materialistic things or ephemeral things. People often end up with various Big Billion Deals or The Great Indian Sale and end up spending more than necessary, which leads to less savings and not enough investment. One should limit the expenditure by preparing a regular budget which will lead to more focus on saving and investing.
try to time the market
Time and again, the markets have proven that it is not about timing the market, but the amount of time you spend in the market that is important. It seems easy to buy at low price and sell at high price but it is far from reality. There is no guarantee as the market volatility is daily and no one can predict the direction of the market. When you try to time the market; Then intuition, prejudice, fear of missing out take over the simple logic of investing. One should focus on research and the only time that matters is the time you start investing and how long you stay in the market.
The investment should be backed by strong research and a realistic goal in a given time frame. Ensuring that individuals are aware of the above mistakes may not guarantee profits, but will ensure that investments are protected from the uncertainties of the markets and life.
(These are expert’s personal views. Before investing, be sure to consult your financial planner.)