Investing is not just about picking winners, but also about avoiding mistakes. Retail investors can be better off if they avoid making the following mistakes.
Missing the benefits of compounding of capital – Learn from Einstein
Albert Einstein is reputed to have said that compounding of capital is the 8th wonder of the world because it allows for the systematic accumulation of wealth. Even though any one in class 5 could tell you how compounding works, retail investors ignore this basic concept.
Compounding of capital can benefit you only if you leave your money uninterrupted for a long period of time. The sooner you start investing, the bigger the pool of capital you will end up with for your middle-aged and retirement years.
Don’t wait to start investing only when you have a large amount of money to put to work. Start early, even if it’s with a small amount. Watch this grow to a very large amount with the passage of time.
Timing the market – Around 99% of investors will fail in this strategy
Its very difficult to time the market, i.e, be smart enough to buy at the absolute bottom and sell at the absolute top. Professionals understand that timing the market is a wasted exercise.
Retail investors always wait for that elusive best opportunity to get in or to get out. But by waiting they let great investment opportunities go by. You should use systematic or regular investment plans to make investments. You’ll have to make fewer decisions and yet can accumulate substantial wealth over time.
Selling in times of panic – You should be doing the opposite
The best opportunity to buy is when the markets are falling and there is fear in the minds of investors. Yet, many retail investors do exactly the opposite. They sell when the markets are falling and buy only when the markets are high. This way they end up losing twice – by selling low and buying high, when they should be doing exactly the opposite.
If nothing has changed about the long-term outlook for the company that you own, then you should not sell this company’s stock. Use this opportunity to buy more of the same stock in falling markets. Some of the world’s biggest fortunes were made by buying when others were selling in panic.
Diversifying too much will kill you – Investing is all about staying alive
Beyond a point, having too many names in a portfolio can be counterproductive. You might end up duplicating, or end up taking too much exposure to a sector. Over-diversification can upset your portfolio, especially when you have not done enough research on all the companies you have invested in.
If you are an active investor in the stock market, maintain a manageable portfolio of 15-25 names. Instead of adding new names to this portfolio, recognise ideal ones. Then back them with more capital. In the long-run, this will produce better returns for you than adding another 20 names to your portfolio. Investing is all is about patience and discipline. By avoiding mistakes you can improve the long-term performance of your portfolio, whatever the economic conditions prevailing in the market.