5 Common Mistakes That Tank Your Returns

What are the major mistakes that hinder an investor's journey?

Successful investing is all about avoiding mistakes because you have to get very few things just right. The first one, which comes to my mind, is actually not a mistake - it turns out to be a mistake in hindsight.

1. Starting late

The magic of compounding is impressive but it actually shows up only after 10 years.

In the initial phase of our life, when we are just starting out and earning, we have a lot of huge financial needs. We are starting from ground zero as independent individuals. At the same time, our income is quite low. We are able to find hundreds of excuses to procrastinate - saying, "I will do it tomorrow."

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But my understanding is that investing starts only after you save. And savings are more about building a habit, not about how much money you have. You need to see how a small amount of money can become meaningful capital. Compounding at a higher rate works its magic over time. Wherein, starting early plays a very significant role, and that, I think, is crucial.

2. Timing the market

In my 34 years of running Value Research and observing the markets, every time it looks like the market is at a level where it either can't make a comeback or is comfortably high, the reality often defies these assumptions. When the market is high, it feels normal - like it should be there. And we feel happy. When the market is low, investing feels psychologically tough because putting your money in and seeing it fall the next day creates an immediate feeling of loss.

The reality is this: you can't time the market. Start with the premise that markets move in ways that are least predictable. No professional has been able to master it consistently. It's an act of belief - of faith - to get started. You need to think in terms of time frames, amounts, and discipline. Only then will you understand that timing the market may not be worth the effort.

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3. Being driven by fear and greed

These emotions are often why people attempt to time the market.

People don't want to lose their money, so they hesitate to invest when the market is low. Similarly, people want to grow their money, so they invest heavily when the market is rising. But when the markets fall, they lose money and develop some fear of the markets. This is just how the markets are - they have declining phases and rising phases.

You have to develop the belief that these phases are normal. When faced with a big decline or a big rise, you need to hold steady. You also need to have a system in place - shock absorbers, so to speak - so that you don't crumble during market lows and can benefit from reasonable gains during highs.

Fear and greed drive investors to speculative decisions, like investing anywhere during a rising market or using borrowed money to make quick gains. But when you lose with borrowed money, the losses are much bigger because it is a leveraged trade. So, being disciplined, methodical, and overcoming these emotional cycles of fear and greed is critical.

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4. Not understanding risk tolerance

If you've invested Rs 10 lakh, and in six months, it drops to Rs 7.5 lakh or Rs 6 lakh, how upset will you be?

Understanding risk tolerance is about reconciling this discomfort by being aware of your investment horizon. If you don't need the money for another 10 years, can you stick to your plan despite the decline? This is a crucial question.

Risk tolerance changes over time. In the early stages of your career, you might think, "I have time to recover from losses." But as you approach retirement, when your income stream ends, you'll naturally become more cautious.

How do you calibrate your change in risk tolerance?

This is why asset allocation is essential. In the beginning, don't worry too much about allocation. But as your savings grow to a meaningful amount - say, 10 years' worth of savings - allocate 25 per cent to fixed income. This creates a cash buffer that absorbs market shocks, and you'll have money to invest during market dips.

As you near the withdrawal phases, structure your investments to allow a 4 per cent annual withdrawal rate while still protecting your capital through equity exposure. This balance ensures your investments sustain you for the long haul.

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5. Not knowing what you're doing

Many investors simply ask, "Where should I invest?" without understanding why they're investing. While a good advisor can help, you need to understand your investments to stay the course during lean periods.

Investing based solely on past performance is another common pitfall. After all, regulators constantly remind us: past performance is no indicator of future returns.

If you don't understand how markets work, you'll panic at the wrong time. For example, if the market drops by 5 per cent and you don't know that such corrections are normal, you'll likely react emotionally and make poor decisions. So, take the time to understand what you're doing.

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Also read: Primed for investment mistakes

This article was originally published on February 07, 2025.