Common mistakes made by new investors

Risk Management

Investors are unable to have the correct risk return strategy which can lead to substantial losses for the investors.

Lack of patience

With a view to gain short-term returns people lose patience and sell the stock before they have earned a substantial returns.

Not Understanding the Investment

One of the world’s most successful investors, Warren Buffett, cautions against investing in companies whose business models you don’t understand.

The best way to avoid this is to build a diversified portfolio of exchange traded funds (ETFs) or mutual funds. If you do invest in individual stocks, make sure you thoroughly understand each company those stocks represent before you invest.

Lack of knowledge

Lack of necessary knowledge required to choose the right stock to invest. 

Emotions - Falling in Love with a Stock’s/Company

Being emotionally attached to wrong stocks, investors do not switch to better stocks.

Attempting to Time the Market

Trying to time the market also kills returns. Successfully timing the market is extremely difficult. Even institutional investors often fail to do it successfully. A well-known study, “Determinants of Portfolio Performance” (Financial Analysts Journal, 1986), conducted by Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower covered American pension fund returns.

Failing to Diversify

While professional investors may be able to generate alpha (or excess return over a benchmark) by investing in a few concentrated positions, common investors should not try this. It is wiser to stick to the principle of diversification. In building an exchange traded fund (ETF) or mutual fund portfolio, it’s important to allocate exposure to all major spaces. In building an individual stock portfolio, include all major sectors. As a general rule of thumb, do not allocate more than 5% to 10% to any one investment.

Too Much Investment Turnover

Turnover, or jumping in and out of positions, is another return killer. Unless you’re an institutional investor with the benefit of low commission rates, the transaction costs can eat you alive – not to mention the short-term tax rates and the opportunity cost of missing out on the long-term gains of other sensible investments.

Waiting to Get Even

Getting even is just another way to ensure you lose any profit you might have accumulated. It means that you are waiting to sell a loser until it gets back to its original cost basis. Behavioral finance calls this a “cognitive error.” By failing to realize a loss, investors are actually losing in two ways. First, they avoid selling a loser, which may continue to slide until it’s worthless. Second, there’s the opportunity cost of the better use of those investment dollars.

How to Avoid These Mistakes

It is recommended to take the help of a financial advisor in making your investment decisions. This saves one from many meshes and the fee is nominal in comparison to the benefits advisory brings to the table. Write us or go to Lakshya Invest  to avoid these common mistakes and keep a portfolio on track.

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