Finance has always been a topic of intrigue. The lack of financial literacy is the cause of countless unfortunate events like scams, frauds, and Ponzi schemes. With the rise in finance-based topics in popular and social media, the public has become aware of such events. On the other hand, they also show the glitz and glamour of the world where high risk gives high rewards. However, these only scratch the surface.
Investments will always remain fascinating because of the potential of wealth creation. This article covers some of the common mistakes while investing.
Reasons for investing
Always remember why you are investing. Have a realistic idea of your financial situation and set long term and short-term goals. This information will help you align your investments with the goals accordingly. These factors will also define why you would choose a particular financial instrument.
Looking for the ideal time
It is often advised to start investing as soon as possible. It isn’t easy to time the market correctly. Markets usually go through seasonality and multiple cycles. For long-term financial goals, it is preferable to avoid considering the short term volatility of the market and keep your eye on the prize.
Determining based on past performance
Often the past returns become a significant factor in choosing a financial instrument. It is imperative to look at the whole picture of why that particular instrument gave those returns at that time. Sometimes, assets that have been performing very well might get overvalued and become risky choices.
Not diversifying and keeping a regular check
Diversifying portfolios is essential for risk management by allocating investments in various industries using different financial instruments. Not only does it mitigate risk, but it also opens you up to more opportunities for returns. Investing in different industries also reduces your exposure to adverse market conditions.
Keeping a regular check on your portfolio helps you understand which assets are performing and which are not. Reviewing will also help you in minimising your losses.
Not keeping an emergency corpus
An emergency corpus is built over a period with discipline. It is primarily made for uncertain times, like medical emergencies, unexpected job losses, etc. Emergency corpus safeguards your future investments, such as your retirement plans or children’s education plans. If you ever need to use the corpus, always put in the same amount as soon as possible. For medical emergencies, you can also have health insurance cover.
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