Last week, on a road trip from Bangalore to Pondicherry, I wondered why investors do not plan the same way as holiday-makers. After all, they are the same individual. We normally think about where we wish to reach, and at what time. Which is the mode of transport to use, and where will we stay? Of course, what�s the total budget planned for the holiday? This gave rise to the first list of common mistakes that investors make.
Not having a planned financial goal: If we do not know where we wish to reach, we�ll never know when we have. There are speed breakers on our journey, traffic lights and �dashing� pedestrians. We may be a bit delayed in reaching, with a higher fuel consumption (investments may not deliver the desired returns); but we should never lose sight of the final destination.
Taking more risks than that are necessary: It is imprudent to budget three hours to complete a 300 km road journey on Indian roads, where the maximum speed limit is 80 km/ hour. There is a possibility that you may reach faster: conversely, you may not reach at all. Keep a close watch on your asset allocation.
Targeting maximum returns on all investments at all times: How often have changed lanes to the �faster-moving� one in city driving only to realize that our original �investment� was better! It will be unwise to bet the savings that we need for a committed payment in the next three months in the equity market, irrespective of the euphoria prevailing. Equities are only meant for the long-term.
Aiming for maximum safety: October 2008 was as close to doomsday as we may possibly imagine. We proceed albeit at a slower pace when the road is dotted with potholes; but we do not abandon driving altogether. For financial goals that are some distance away (three years or plus), we need to benchmark investments suitably, rather than comparing them on a weekly basis. Keep in mind your returns post-tax and net of inflation.
Relying on tips -- and neighbours: When one of my colleagues boasted of his conquests in trading, I was at first envious of him. Then I wanted to emulate him. As I grew wiser, I realized that he would only publicize his successes, and never his failures. Don�t we get tips of what to buy and when, but never when to sell? And that�s how dud stocks adorn our demat statements.
Do- it- Yourself Mania: Ever wondered where India would have been if the world did not seek outsourcing? Handing over what you can�t do best to an expert is an accepted norm. But with the recent media explosion, we do feel that we have the ammunition to manage finances on our own. My mantra is that three conditions need to co-exist: detailed understanding of finance; (full) time at our disposal; and ability to remove our emotions from our investment decisions (can sell poor selections at a loss) --- only then can we do without a qualified financial advisor.
Each one of us believes he is unique. Yet, we are checking if our list of investment mistakes matched that of others. And therein is the seventh mistake. With the New Year around the corner, it seems a good time to discard this baggage and start afresh.
(The author is the Managing Director and Chief Financial Planner of International Money Matters Pvt. Ltd.)
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