5 common investment mistakes young investors make!
Investing is a skill and needs to be learnt. People who
start early have the advantage. At a young age one usually has a greater risk
taking appetite and can afford mistakes. They are in a position where they can
recover the money lost due to erroneous investments. Like in any skill set,
mastery in investing comes in through knowledge, discipline and targeted
practice. Setting financial goals are the first step for a disciplined
investment pattern.
Many of us have goals, but not everyone is able to achieve
them. When it comes to building huge corpus or retiring early or building a
huge asset pool, it can come in either through pompous income or strategic
investments. While the first is not easily applicable to all particularly for
the salaried class, the latter is a powerful resort at hand for all.
Investment without any strategy or wrong strategy may often
lead into debt traps and poor returns. Often people in their twenties tend to
procrastinate their investments and saving until they realize its importance.
By then they are already in their early thirties and have greater liabilities
than a twenty year old. Here are some common mistakes that beginners happen to
make when setting financial goals and investment strategies.
1.
Investing without financial goals
People keep investing aggressively without
associating their investments with any particular goal. Often such open ended
funds are like journeys made without destinations. Be it in an auto rickshaw or
an Audi, if you do not have a destination, it is not worth it since the only
difference would be the comfort of the journey and no sense of achievement.
Similarly it doesn’t matter if you invest/save ₹ 1000 or ₹ 100000
per month, simply investing is the best option you would like to take. Once you
have a destination, you may choose the route that you wish to take.
Avoid open ended investments. It is
important to align your investments with your goals and choose schemes
accordingly.
2.
Picturing various financial goals separately
Seeing financial goals in isolation is a very
foolish thing to do. Often the success of scheme will depend on the performance
of other when it comes to individuals and their goals. If is like if you get up
late it is going to affect the time you reach your office. A retirement goal
success may depend on saving quality in present which in turn will depend on
present commitments. Budgeting your income must be done keeping in mind all the
goals and linking each other. Linking goals will also help prioritize them.
3.
Not quantifying goals
Now that you have understood the importance
of goals and linking them, we move on to another mistake that may seem
insignificant but adversely affects financial optimization. Believing that you
have set your goals, you need to provide goal posts to them! Deciding to save
for a car or a house is a vague goal. It doesn’t say how much or in what time.
Hence there is no plan! Your goal needs to be like buying a car worth ₹ 6
lakhs in next 3 years. This gives you the quantum in value and time and you can
accordingly choose schemes and budget for them. However be careful in
specifying whether the value you are talking of is present value or future
value. A car worth ₹ 6 lakh would in 3 years be worth ₹ 7.56 lakh considering an
inflation of 8%.
4.
Lack of flexibility
The new investors do not realize that goals
and investments are dynamic and change with time. Targets set when one is in
their early twenties may change as they approach and reach their thirties or
once they get married. Also there are certain unforeseen expenses that might
come your way in the form of medical expenses, financial losses, accidents,
etc. These would often require relabeling of ones goals and budget. Therefore a
cushioning flexibility is what you should take into account while planning
financial goals.
5.
No performance review
Yes! Like your company reviews your
performance at work, since they invest in you, you must too! Most people invest
and forget about it. You may make a point that since you have set a timeline
and finalized a scheme by analyzing all the aspects, why should you bother
about the performance until the timeline is near. A regular review of the
performance is necessary since the performance of a fund depends on multiple
aspects that one cannot analyse way in advance. Such factors may change during
the tenure of investment. These may be government policies, economic scenarios,
Nature of asset allocation, Geo-political emergencies, etc. Therefore you need
to review your plans and their progress and performance from time to time. The
frequency of review may be decided based on the scheme, the amount invested,
the risk taken and the priority of the goal set.
Investments are important and the millennial population are
very much aware of its importance but to know how to do it correctly has its
own perks. Hope this write-up useful and helps you strategize your savings and
investments correctly to achieve financial goals. Remember, you do not become
financially independent when your finances take care of your investment plans
but when your investment plans take care of your finances.
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