5 common investing mistakes

March 13, 2007 09:14 IST

Bad investments or wrong investments are a part and parcel of any portfolio. The idea is not to get defensive about it but to understand the reason(s) and make sure we don't repeat the mistakes.

Broadly speaking, bad investments can happen due to two reasons.

One, of course, is market conditions. Say you invest in a share after due research. But the company fails and you lose money.

Or you have a fixed deposit (FD) in a co-operative bank, which runs into problems and your money is stuck. Or you invest in a five-year FD and, immediately afterwards, the rates are revised upwards.

These situations are beyond your control. These are market risks which are part of any investment. You win some, you lose some!

The second reason has to do with ourselves -- our knowledge, our psychology, our research, et cetera. These factors are under our control. If we exercise this control diligently, we can keep away from bad or wrong investments.

1. It's greed, of course

Call it the get-rich-quick mentality, double-my-money-soon or maximum-returns-in-minimum-time. In one word, it is greed.

How many times have you invested in a scrip just because someone tips you the investment would double soon? Or you wrote a cheque because someone offered high interest rates?

When someone talks about giving returns which are higher than the average market returns, he will not give it out of his pocket. He will take unduly high risks with your money or he simply has no intention of returning your money.

More often than not, you lose money in such so-called high-return schemes. The simple rule is to invest where the returns are more or less in line with market realities.

2. The fear of losing

I don't like losing money. You don't either. No one does. But does that mean we should sweep money under the carpet and not invest it?

Every investment has a certain risk associated with it. We consider equity as risky and public provident fund (PPF) as safe.

This is a wrong belief.

A few years ago, I invested in PPF assuming I would earn 12% p.a. returns for 15 years. But the government started reducing the rates. Now, it earns just 8%. If this isn't interest-rate risk, what is?

Similarly, those who simply invested in the Sensex over the last 15 years never lost money. In fact, they made a decent 15% p.a. returns.

The idea is not to run away from risk. Understand it, appreciate it and manage it. This will help you make the right investment choices.

3. My-friend-said-so syndrome

We are lazy when it comes to investing our money. Instead of doing our own study about an investment scheme, we usually take the shortcut. We will seek opinion of a friend or a colleague or the broker and invest.

It is not that they have any bad intention and hence may give you a wrong advice. The problem is that many of them are as lazy as you are. And, therefore, their opinion is also based on something they heard somewhere. It is not an informed opinion.

So the moment you invest in hearsay or rumour, you open yourself to the risk of wrong investment.

4. One suit doesn't fit all

There is no single scheme that is good for everyone.

For example, companies like Infosys or Reliance are well managed and growth-oriented ones. Hence, you can expect to make good returns by investing in such shares. But that doesn't mean everyone can invest and make money.

Investing in Infosys or Reliance may not be right and may not serve the purpose for a retired person who needs a regular income from his investments.

Take Fixed Maturity Plans (FMPs), which offer more than 8% post-tax returns. These are great. But if I have an investment horizon of, say, five years and a high-risk appetite, FMPs are not the right option for me.

I could invest in good shares/ mutual funds and expect to earn much higher returns.

So instead of asking whether an investment is 'good', ask whether it is 'right' for my financial profile and then invest (except, of course, investments which are basically a fraud).

5. The pushy salesman

Pushy, unscrupulous salesmen are the bane of any industry. This is true of financial services, too. These people have one objective: to earn maximum commission. In pursuit of this objective, they will not look at your interest.

Your objectives and that of a salesman are likely to be in conflict. They will push products that earn them higher commission.

But these may not necessarily be suitable for you. The products which are actually good for you are hardly ever discussed.

To prevent being sold a wrong product, you must have some basic knowledge. You can't take shelter saying it is too complicated.

Keep away from these common pitfalls of investing and cut down wrong investment choices by more than 75 per cent. It will also help you deal with market risks more effectively. You control your financial future, not the market