This is the third and final post in the 3-part investment mistakes to avoid series. As I mentioned earlier I have divided the entire investment journey into 3 stages:
- Initial Stage (Before Investing) – where you have not yet started any investment process.
- Second Stage (While Investing) – where you decide and select suitable investments in order to build a solid portfolio.
- Final Stage (After Investing) – where you have built your portfolio and are looking forward to financial freedom.
Stage 3 – After Investing
By this stage you have already planned and created a suitable portfolio, and are hoping to earn good returns from your investment portfolio. But it’s important that you should be aware of some common mistakes made by investors in this stage and avoid them at all cost. If you fall victim to any such mistake your returns can take a nosedive and all your hard-work and efforts will be wasted. Here we go:
- Letting feelings take control
Never ever allow feelings like fear, greed etc. to overrule rational thinking while taking investment decisions. Your feelings are your worst enemy when it comes to investment. They always prompt you to act irrationally and take wrong decisions which only harms your portfolio and prevents you from achieving your financial goals. Read my earlier post on this topic to understand how feelings cause problems and how to prevent such problems.
- Timing the market
This is the biggest mistake you can make. If you try to time the stock market, chances are you will fail. This is because there is no set formula or technique available for timing the market correctly. It is not possible to predict when the market has hit its lowest. It’s even harder to predict when it will begin to go up. More money is actually lost in preparation or anticipation of market correction than in the actual correction of market itself. It would be way better if you spend time in staying in the market (read: HOLD) instead of timing the market, this will turn you from a speculator to an investor.
- Investing without an exit strategy
Exiting is as important as investing. Therefore it is necessary to have an exit strategy in your investment plan. Not knowing when to withdraw money, or not having the discipline to stay invested, can cost you more than you can imagine. It’s important to know when to liquidate your investments. Investing is not the goal itself it is a means to reaching your goal. You can learn all about exit strategy from this post.
- Forgetting to replenish
There might be some valid reasons or occasions where you have to withdraw your invested money before it has fulfilled its purpose. But while doing so may be justified, it’s not acceptable to forget or ignore replenishing the drawn amount as soon as possible. Remember that you invested that money for some purpose, and that reason of investment is still there. But unless you refill the amount you can’t reach your goal, and not to mention the more you delay the more you deprive yourself of the compounding benefits.
- Not reviewing your portfolio regularly
Investing process doesn’t stop once you select and build a portfolio, its an ongoing process. Hence, it is important that you should keep reviewing your portfolio in a timely fashion. This will help you to be sure that everything is on track. For example, if you review your portfolio regularly, you would be able to remove the losers and non-performers from your portfolio before they could play havoc with your entire investment strategy, as opposed to if you just invest and ignore. Remember, both inertia (let it be attitude) as well as impatience (changing from one investment to another too frequently) are bad for your investment health. Best strategy is to review your portfolio once or twice a year and taking the required actions.
- Ignoring tax & inflation implications
This is the most common mistake made by many people. They consider returns in absolute terms, and forget to calculate what the real return is after calculating taxes & inflation. For example, say you invested ₹10,000 three years ago and now after three years your investment is worth ₹14,800. That’s a capital gain of ₹4800. If you had invested in an equity mutual fund then the long-term capital gains tax on it is nil. But if you had invested in a debt mutual fund you will have to pay 20% tax with indexation. Indexation takes inflation into account so it can be calculated that the ₹10,000 you invested earlier is now worth ₹11,900 by itself, taking inflation into account. So you would pay taxes on 14800-11900 which is ₹2900 (& not ₹4800). I’ve written an entire post about capital gains tax calculation for mutual funds earlier.
- Forgetting to update beneficiaries
Estate planning also play a vital role in your investments, after all you are investing for the future. Therefore having a will is necessary, but in the interim it is important that you should appoint appropriate nominee(s) for your investments. This will prevent any dispute from arising in the future in case of your death. Whenever possible, investments should be held in joint names, in this case it will be simple and easy for second holder to take over in your absence.