Top investing mistakes that new investors make, how to avoid them and what to do instead
16-Aug-2021 •Deepika Saxena
Volatility is the inherent nature of the market. The roller-coaster ride of the markets over the past one-and-a-half years has corroborated this fact. In March 2020, the markets across the world witnessed one of the steepest falls, owing to the pandemic-led slowdown. But during that time, nobody was able to predict that the markets would not only recoup all the losses but also scale new peaks in the next one year.
Even though economic indicators are not very impressive, the market is riding on a bull run. It has ultimately made investors believe that the markets are ripe for an impending correction. This has left many investors worried about their portfolios. Some are even trying to book their profits and exit the market.
Against this backdrop, we focus on the general tendency of investors in different stages of their life and then, outline the things that they should do to make their portfolios bulletproof. Let's start with new investors.
Mansi, an IT professional, started working three years ago. Since she was aware of the importance of investments, she started investing right from the beginning. Apart from investing in two-three core equity mutual funds, she also tried her luck at trading stocks. For Mansi, everything was going good until the pandemic hit and the market fell by about 23 per cent within a month. It led to a devastating blow to her portfolio, thereby shaking her confidence in equity. Gripped by the fear of further losses, she even withdrew a part of her investments and planned to return when the market had bottomed out, thus making her loss permanent. However, the market recovered pretty soon and she had to enter at a high.
Not only Mansi but many young people who have just embarked on their earning and investment journey faced a similar situation. Investors in this age group generally have little knowledge and experience of the markets and often venture into several investment avenues that can be risky for their long-term goals.
The following is a list of common mistakes that these people make with their investments, as well as the correct way to manage their investments.
Starting the investment journey with core equity funds: Although these investors are not familiar with the ups and downs of the market, they often get lured by the past returns of equity funds and start investing in them without understanding the risks associated with these funds. And when they witness a downfall in their investments, they tend to panic and make decisions in haste.
A conservative investor should start the journey by investing in aggressive hybrid funds. These funds invest about 65-80 per cent of their assets in equity and the rest in debt. While the equity portion of the portfolio helps capture the bull run of the market, the debt portion provides a cushion during the market falls, thus providing psychological comfort to new investors (see the graph: 'Downside protection')
Taking the lump-sum route: Investing in one go can be dangerous. Since the market is unpredictable, it can fall just after you have made your investment and may lead to a long wait before you can actually recover your losses, let alone gain from investments.
Time and again, financial experts have highlighted the importance of taking a staggered entry into the markets through SIPs. This is because entering the market through the SIP route helps you avoid capturing the market at a high and averages out your purchasing cost.
Exiting because of the fear of losses: The fear of further losses when the markets turn volatile often makes investors exit their investments, thereby making their loss permanent.
Equity markets can be very volatile in nature, more so in the short run. However, in the long run, they tend to deliver much better returns than those of fixed-income alternatives. See the graph 'Short-term volatility'.
Chasing momentum: With little investment knowledge and experience of the market, investors tend to follow the advice of their friends or financial advisors. Some investors also tend to chase momentum and invest in sectoral/thematic funds. However, the problem is that many investors tend to invest in a booming sector only after much of the rally has passed. Thus, they end up investing at the later stage of the momentum in anticipation that the rally may continue further, which ultimately leads to disappointment.
It is advisable for investors to understand their risk appetite and investment horizon. Based on these two things, they should devise an asset-allocation plan. One should stick to the plan and investment principles without foraying into different investment avenues.