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Monday, October 6, 2008

Ten mistakes equity investors generally make

A nice and prudent article

People lose money in stock markets more because of their own mistakes, than any market turmoil and other such things.

For instance, it has generally been observed that equity investments are often guided by greed and investors seldom do their homework before putting their hard-earned money in stock markets.

Besides, they often resort to speculation and keep 'timing the market', which has not proven to be a great strategy.

Lots of investors also presume that the market will only go northwards and the bull run will never end. But that never happens. Not in any market of the world. But that's how it is.

Here are 10 such mistakes that equity investors generally make:

1. Guided by greed

Many investors have been losing money in stock markets owing to their inability to control greed and fear. The lure of quick wealth is difficult to resist, particularly in a bull market. Greed augments when investors hear stories of fabulous returns being made in the stock market in a short period of time and, thus, lose their hard-earned money in many cases.

2. Following herd mentality

Following herd mentality is another reason for the investors’ losses. “It has been witnessed that the typical buyer’s decision is heavily influenced by the actions of his acquaintances, neighbours or relatives. So, if everybody around is investing in a particular stock, the tendency for potential investors is to do the same. But this strategy may backfire in the long run,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.

3. Resorting to speculation

Investors also face losses because they speculate and buy shares of unknown companies. They should, therefore, avoid relying on random tips and go for long-term gains only.

4. Lack of research

Proper research should be undertaken before investing in stocks. But this is rarely done. Investors generally go by the name of a company or the industry they belong to. But this is not the right way of putting one’s money into the stock market. “Therefore, if one doesn’t have time or temperament for studying the markets, one should always take the help of a suitable financial advisor,” says Kapur.

5. Creating leveraged positions

Many investors suffer from creating heavy positions in the futures segment without really understanding the risks involved. Instead of creating wealth, however, these investors burn their fingers very badly in case the sentiment in the market reverses.

6. Panic selling

In a bear market, investors panic and sell their shares at rock bottom prices. Trading on the bourses was suspended on May 17, 2004, May 18, 2006 and recently on January 22, 2008. Investors who had taken speculative positions lost heavily when blood was on the street. Even investors who had the capacity to hold on to their investments, lost faith in the markets and sold their investments in a hurry, thus incurring heavy losses.

7. Timing the market

Many investors try to time the market. But this has not proven to be a great strategy. Historically, in fact, it has been witnessed that even great bull runs have shown bouts of panic moments. The volatility witnessed in the markets has inevitably made investors lose money despite the great bull run. Therefore, only prudent investors who put in money systematically, in the right shares and hold on to their investments patiently, have made outstanding returns. So it’s not ‘timing the market’, but ‘time in the market’ which creates wealth. Hence, it is prudent to have patience and always keep a long-term broad picture in mind.

8. Putting all eggs in one basket

Another mistake which investors generally make is non-diversification of their portfolio. They generally put all their money in limited and favourite stocks which are in momentum. So, investors should diversify their portfolio across industries and size of the companies. Also, it is important to diversify across asset classes – equities, real estate, bonds, commodities, cash etc.

9. Avoiding financial planning

Investors also do not apply financial planning practices in their investment approach. They should follow an asset allocation model and invest only in long-term funds in the equity markets. They should also keep rebalancing their overall portfolio from time to time to keep their exposure to equity markets at the desired ratio of the total portfolio.

10. No monitoring of portfolio

We are living in a global village. Any important event happening in any part of the world has an impact on our financial markets. Hence, we need to constantly monitor our portfolio and keep affecting the desired changes in it. If one can’t review one’s portfolio due to time-constraint or lack of knowledge, they should take the help of a financial advisor.
Source:Sanjeev Sinha,

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