These 8 Investment Mistakes Could Ruin Your Financial Wellbeing

Given that there are so many financial products, it's difficult for investors to understand and plan suitable investment avenues. Also financial market information available from various sources can make the decision-making process so much more complex for investors. These factors coupled with fear of making the wrong investment decision can affect your financial wellbeing. This is why the investment decisions you make play a significant role in the process of investing as well as your financial wellbeing and success as an investor.

Though investing your hard-earned money is a complex task, you don't want to make any investment mistakes that could ruin your financial wellbeing. Many investors are unaware of this and frequently make investment mistakes that lead to bad financial health. For instance, during market crashes and lows, many investors panic and liquidate their investments without comprehending the whole situation, and this has a negative impact on their financial wellbeing.

Unfortunately, investors continue to make these common investment mistakes and do not commit to learn from the mistakes of other investors, due to their lack of awareness.

Are you aware about the common investment mistakes affecting your financial wellbeing...?

 

Well, let me guide you through such investment mistakes and how to avoid these while investing and maintain your financial wellbeing:

1. Investing without any financial goals

No wind is right unless you know which harbour you have to reach...

An investment plan that revolves around meaningful financial goals can help maintain your financial wellbeing. To attain a financially secure future, your goals should be S.M.A.R.T. and must align with your investments accordingly.

These goal-oriented investments provide the focus and determination required to pursue a life being financially independent. So if you think it is too early for you to plan for your retirement, then you are mistaken. Setting long-term financial goals such as a retirement plan helps you evaluate the investment horizon required to build a corpus and gives your investments sufficient time to grow without compromising on your level of risk tolerance.

2. Taking more risk than you could afford

"Cut your coat according to your cloth" - John Heywood

The Risk-Return trade-off principle is a very basic and profound investment principle. You see, lower risk is associated with low potential returns, whereas a high level of risk is associated with high potential returns. To generate higher returns, many investors tend to invest in highly risky investment propositions without analysing their risk tolerance.

While investing, assess your risk tolerance objectively and do not be anxious or greedy about gaining higher returns. If you take more risk than what you could actually afford to, loss of capital will be highly inevitable. When you make an investment decision, do consider your risk tolerance, your ability and willingness to lose a portion or all of your original investment in exchange for greater potential returns.

You should never invest in highly risky investment avenues if you cannot stomach the level of risk it carries, it will damage your financial wellbeing.

3. Investing in financial products you don't understand

"Know what you own, and know why you own it" - Peter Lynch

There are multiple investment avenues to invest your hard-earned money in such as mutual funds, FDs, stocks, bonds, etc. Novel investors make the mistake of investing in financial products that they do not understand. In simple words, if you are choosing to invest in a mutual fund scheme you don't understand, then you won't understand what type of returns to expect.

Thoroughly understand where and how your hard-earned money is being invested and how well that investment avenue performs. Investments made based solely on the idea to generate higher returns without understanding the features and suitability of that particular investment avenue in your portfolio are usually unsuccessful. As a result, this will affect your financial wellbeing because your investment portfolio will underperform due to such unworthy investments.

4. Timing the market

Time in the market trumps timing the market...

One of the most common mistakes investors make is they endeavour to time the market. The inherent volatility of the financial markets makes predicting its movements a challenging and irrelevant task. Though the markets have some patterns and historical data that can be helpful indicators when making future investment decisions, however, that does not always signal the direction in which the market will head. This investment mistake affects the performance of your investment portfolio that ultimately leads to a misbalance of your financial wellbeing.

5. Lack of diversification

"Diversification is an established tenet of conservative investment" - Benjamin Franklin

Investors make the mistake by putting all their eggs in one basket; they allocate a large investment exposure towards a specific asset class. Diversification emphasises risk management and offers value to your investment portfolio, as different assets classes have low correlation with each other. In other words, no two asset classes perform in same direction and diversification helps mitigate the overall risk to your portfolio.

Not diversifying, however, will position your hard-earned money at extreme risk and a concentrated investment with allocation to a particular asset class could negatively affect your entire portfolio, and, therefore, your financial wellbeing. Aligned with your financial goals, diversification can create a well-balanced portfolio that could weather any storm.

6. Investing in 'what is hot'

One man's meat is another man's poison...

Investors tend to gravitate towards the latest trend in the market, the 'flavour of the season'. If you are investing in what is hot (the most highlighted investment avenues), you are following the crowd. The 'herd mentality' influences investors to make investment decision based on peer pressure. It plays a notorious role in making bad investment decisions. In many cases, the majority of people only hear about an investment when it has already performed well.

Most conservative investors feel safe when they take a decision similar to what everyone around them has taken. But do note that, a product suitable for your colleague or your relative/friends need not be suitable for you as well. Therefore, avoid making a mistake of investing in the market trend or the hot pick of the month; instead focus on your suitability with the investments.

7. Decisions influenced by behavioural biases

"The most contrarian thing of all is not to oppose the crowd but to think for yourself" - Peter Thiel

Another common investment mistake is relying on your behavioural biases, which are irrational beliefs. These may unconsciously influence your investment decision-making process, the essential element to maintain your financial wellbeing.

You may come across several biases that can affect your investment decisions and your wealth creation journey. In order to safeguard your investments and financial wellbeing, make every investment decision based on in-depth research and analysis, not arbitrarily.

8. Lack of financial literacy

"An investment in knowledge pays the best interest" - Benjamin Franklin.

The most underrated investment mistake is the lack of financial knowledge. A key indicator of your ability to make effective investment decisions is your level of financial literacy. Investors overlook the idea of enhancing their financial knowledge, which could empower you to make informed investment decisions.

Financial knowledge will enhance your awareness and prevent you from making any investment mistakes that could be detrimental to your financial wellbeing. An individual must attain financial literacy to become his or her own financial planner and the financial guardian for their family.

Notably, a lack of financial knowledge has consequences such as poor investment judgments and the repetition of previous investment mistakes, etc. Financial literacy aims to assist investors to better comprehend the intricacies of financial planning, saving, and investing. It is a life skill that you must grasp to maintain sound financial wellbeing.

An individual must be well equipped with financial knowledge to comprehend the investment mistakes mentioned above. It is time to empower yourself with the weapon of financial knowledge to guide your family with informed investment decisions and prevent them from making any investment mistakes that could ruin their financial wellbeing.

PS: PersonalFN understands that not everyone holds adequate financial knowledge. We encourage you to gain and enhance your financial knowledge and become a 'Financial Guardian'. You should understand the financial planning elements to become your own financial planner and guide your family through these challenging times.

And in case you are wondering how to become a financial guardian for your family, PersonalFN's latest special initiative, the "Certified Family Guardian" offers you an exclusive opportunity to learn the finer nuances of money management.

Organised into eight modules with 24 extensive videos, the "Certified Family Guardian" will help you with all the relevant tools and learning modules needed to get better at money management. It also offers a host of other benefits to help you make informed investment decisions. Read here for complete details.

So, if you wish to improve your financial knowledge and prevent investment mistakes that could ruin your financial wellbeing, enrol to "Certified Family Guardian" course today!

Warm Regards,
  Mitali Dhoke
Jr. Research Analyst

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