Mistakes Investors Make That You Should Avoid

Hello fellow investors!

This Thursday, we are sharing a few mistakes that a beginner does when he/she starts investing and it is important that you understand them and act on it accordingly.

1. Not investing

The first and the biggest mistake investors and savers make is not doing it.
Don’t wait for that raise, inheritance, or lottery win. Start today, right now, with whatever you can.

Consider this: If you can save just 100 INR a day every day for 20 years, and earn 12 percent on it, you’ll end up with INR 30,48,395. That’s enough to change your life and the lives of those you love. So let's just start with keeping INR 100 aside.

2. Investing before doing your homework

When it comes to investing in risk assets like stocks, one mistake I’ve made is going on “gut instinct” and 20 minutes of Internet research.

When dealing with investments that can go south, don’t invest without a clue. If you’re thinking about stocks, there’s plenty of online research and information available free, not to mention TV shows and library books.

3. Being impatient

In a post called The 10 Commandments of Wealth and Happiness, the author, Stacy Johnson, offers this advice: Live like you’re going to die tomorrow, but invest like you’re going to live forever.

Stare at a newly planted tree for 24 hours and you’ll be convinced it’s not growing. Fixate on your investments the same way, and you could miss out on a game-changer.

As discussed above, your 100 INR daily grows into 30 lakhs over 20 years, you gotta be consistent and patient.

4. Not diversifying

There are two types of risk in stocks. The first is called market risk: If the entire market tanks, your stocks probably will as well. The other is called company risk: the risk a specific company will do poorly.

It’s hard to eliminate market risk, but you can reduce company risk by investing in lots of companies.

Can’t afford to own a meaningful number of companies? That’s what mutual funds are for. A mutual fund allows you to own a slice of dozens – even hundreds – of companies with an investment of as little as INR 500.

5. Taking too much risk

Everybody wants to double their money overnight. But if you’re always swinging for the fence, you’re going to strike out often.

Some investments are little more than gambling. Investments like options and commodities, for example, promise huge rewards, but the risk is also huge. Don't forget high risk = high returns.

6. Not taking enough risk

On the other side of the same coin, some investors stand like a deer in the headlights, unwilling to take even a measured amount of risk.

Instead, they keep their savings only in fixed deposits and bank, earning less than 6% (which is only reducing) and comforting themselves with Mark Twain’s expression: “I’m more concerned with the return of my money than the return on my money.”

Insured savings will ensure you never lose anything. But they’ll also ensure the purchasing power of your savings won’t keep pace with inflation. In other words, you’ll become poorer over time.

7. Paying too much attention

There is such a thing as information overload. Between the Internet, newspapers, magazines, and cable TV, it’s easy to get more than your fill of conflicting information.

Step back, look at the big picture, find a few financial journalists or others you trust, then tune out the rest.

8. Following the herd

One of the world’s wealthiest men, Warren Buffet, said, “Be fearful when others are greedy; be greedy when others are fearful.”

If you’re convinced the economy is going to zero, buy guns and canned goods. But if you can reasonably expect a recovery someday, invest – even if that day is a long way away, and even if it’s possible things could get worse before they get better.

We have seen the recovery that has happened from the below of March 23, 2020, of the stock market to current where we are almost back to what we were at the beginning of 2020.

9. Holding on when you should be letting go

Equity is best played as a long game. You should hold on long enough to see it through, but not knowing when to get out could cost you big.

Don’t obsess over your investments, but don’t ignore them either.

10. Being overconfident

The economy runs in cycles of boom and bust – when times are good, people often confuse luck with skill.

This is what happened during the housing bubble and the dot.com stock bubble and the past 4 months (March 2020 to July 2020). Being in the right place at the right time isn’t the same as being smart.

11. Failing to adjust

How you invest should change as your life changes. When you’re young, it makes sense to invest aggressively, because you have time to recoup from mistakes.

As you approach retirement age, you should reduce your risk.

12. Not seeking qualified help

While investing isn’t rocket science, if you don’t have the time or temperament, consider getting help.
The wrong help?
A commissioned salesperson more interested in their financial success than yours.
The right help?
A fee-based planner with the right blend of education, knowledge, credentials, and experience - you can contact us at ria.wealthcafe.in

Happy Investing!

Disclaimer: - The emailers are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

Investments - 06/19/2020

How am I investing in current times - Akruti Agarwal

Hoping you all have looked at your investments and decided on your next course of action. I thought it is only fair that I share my investing journey with you at the end of these email series on 'what should you do with your Investments'. I have listed what I have been doing about my investments for the past couple of weeks.

1. I started investing in 2011 with the guidance of my colleagues and newspaper articles. Even for me, this is the first Market Crash where my entire investment portfolio is down by 27%.

It is said that an average investor faces 3 recessions and 1 depression in his life span of 75 years.

We all have to learn how to manage it and make the most of it.

2. This is the time where I can practically put to use everything that I have learnt and read about investments. I am trying my best to deal with the big notional loss in my portfolio, be ok about it and then do my asset allocation.

It is not easy but discussing my money decisions with my family helps me keep my emotions aside and make rational decisions about investing further.

3. Before Investing, let me tell you that I have my term & health insurance in place. I have my Emergency Fund kept aside in a liquid mutual fund which I am not touching. I also had 2 short term goal funds - Travel Fund (though not a priority for the next 1 year, but untouched) and my father's health fund (important right now, so untouched and safe)

4. How am I doing my Asset Allocation?

After ensuring my goals are secured, I set out to do my Asset Allocation.

As per my Risk Profile, I am a Balanced Profile, my Debt: Equity ratio is 50:50

As you can see from the above table, my Equity ratio is down to 36% and to rebalance my portfolio back to 50%, I have sold 14% of my total investments in Debt and started investing them in Equity in a staggered manner. Given that my Risk Profile is a Balanced Profile, I am investing in the Equity market to the extent I am comfortable as per my risk profile and investing it in a staggered manner given the uncertainty in the market. Also, I have been sticking to investing in Large Cap companies and good businesses rather than small-cap companies as I do not want to compound the risk exposure I have in equities. However, where you are an Aggressive Risk Profile, you could invest in small-cap & mid-cap Equity Mutual Funds to take advantage of the beaten-down markets.

'Be greedy when the times are fearful and be fearful when the markets are greedy'

Maintaining my asset allocation is making it easier for me to invest comfortably in the markets right now without letting the emotions take the best of me.

Lots of courage to every investor out there. Keep your cool and think rationally before you make any decisions.

Equity - 03/31/2020

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Should you sell your Existing Investments in Equity?

Hello fellow investors

In one place, where investors are planning to invest more money because there is a downfall in the market, there are some investors who are really worried and are asking us if they should sell their existing investments in Equity Mutual Funds/Equity stocks, book their losses and try to move on.

For the ones who are checking their portfolio every day and abusing their stars for investing in Equity, please read through.

Equity investing was always about 'Long Term - Goals' for more than 3 years.

Don't forget the reasons for which you started investing in the first place.

Think Equity - Think Long Term

Your Asset allocation and goal setting will always be the answer to all these questions.

How does it help to invest in Equity for a long duration?

The way to manage market risk in Equity is by investing for a long period of time.

Historical data from the Sensex proves that if you stay invested in Equity for a longer period your probability of loss reduces. Analysis of BSE Sensex data for the past 29 years shows that the probability of loss diminishes as the investment tenure exceeds 5 years. Data shows that investment for a period of 1-year duration on the first trading day between 1990 and 2018 created a loss probability of 25%. The probability of loss goes down further to 4.55% when the investment tenure goes up to 7 years. The benefits of long term investing are clearly visible as the investment tenure grows beyond 10 years and above.

(this graph & numbers above have been taken from business today article-https://www.businesstoday.in/markets/stock-picks/analysis-why-you-should-be-a-long-term-investor-in-equities/story/267408.html )

In the above graph, you can see that as your number of years of investing in equity increases, your probability of loss reduces.

Having said this, one must always check the quality of shares and mutual funds that they have invested in to ensure that they do not fall under the exceptional cases of this analysis.

Further, note that the analysis presented here is based on historical data, so it is not a true predictor of future outcomes. However, we can gather from this analysis that even with the lack of ability to forecast the future, by investing with a long term horizon, an investor is able to better withstand the detrimental effects of volatility, market downturn and bouts of recession, and achieve a positive ROI.

Hence, if you are planning to sell only because you are worried about what is happening with the markets right now, you should look at your goals & asset allocation and decide accordingly.

Don't try to be speculative right now with the market; just stick to the core values of your investing, do Asset Allocation and long-term investment planning.

Equity - 03/31/2020

Should You Invest More In Equity Right Now?

Hello Investors

We believe that our first email in this chain would have given you direction on how you should go about investing in current times.

Some of you were asking us if they should invest more money in Equity right now? Is this the Big Sale we were all waiting for and should we start investing? Will the market fall more so should we wait or invest now?

No one can tell you with certainty whether we have reached hit rock-bottom. Every time one is thinking it cannot go further down, the markets are reaching another lower circuit.

'You can never predict what is going to happen with the markets as that is not in our control. What is in our control is how we react to the market and take actions accordingly.'

You must keep a note of the below mentioned before you start investing all your money into Equity:

1.Always have an Emergency Fund (at least 4 times your monthly expenses) invested in risk-free investment options.

I cannot emphasize enough on how important it is to have that emergency fund in place, especially in times like these. I do not intend to scare you but I am sure everyone is an expert in their fields and are aware of how the near future looks like. Hence, even before you start investing ensure that your emergency fund is enough to help you sail through the worst-case scenarios in the coming months.

Keep some surplus money with you before you go all investing in Equity right now.

2.Have your Health Insurance and Life insurance in place.

With the current pandemic situation, it important to prioritize our life and health. You must have these insurances to ensure your family has something to fall back on. Also, where there is no security about the future, it is not the smartest decision to just rely on your company's health insurance. It is advisable to have one for yourself and your family members. You can read more about it on our blog.

3.Do not forget the goals and reasons for whichyoustarted Investing in the first place.

Remember our entire discussion from the workshop on how to Invest.

For short term goals - less than 3 years - Invest in Debt (Risk-free Investment options)

For long term goals - more than 3 years and beyond - Invest proportionately in Debt and Equity based on your Asset Allocation.

Debt Investments acts as a cushion when the Equity markets are volatile.

Note: Once your long term goal (more than 3 years) becomes a short term goal (you reach closer to that goal), redeemed/ sell off the equity investments and shift the same to secured debt investments so that any change in the equity market while attaining your long-term goal does not impact your investments.

Now do your Asset Allocation that shall determine how much money you should invest in Debt & Equity in the current market scenarios. Your asset allocation will help you invest based on your risk profile and sleep peacefully even where the markets are being volatile.

First-time investors should also invest based on their Asset Allocation and not invest 100% in Equity.

Remember that it is not the stock that determines your exact return from portfolio but your asset allocation which determines over 90% of the return.

This is probably a good time to open your goal- working sheets (shared during the workshop) and review your portfolio.

Equity - 03/31/2020

How Should You Invest Right Now

Tough times call for tough decisions! Well for us, it is about utilizing our time at home as much as possible and evaluating the action plan what to do now! With COVID 19, the world financial markets are also giving investors quite a scare. While we are all sitting at home and doing our bit to avoid the spread of COVID 19, we at Wealth Cafe decided to share more information on what you as an investor could do to manage your money better.

'Investing is not about avoiding the risk but managing the risk to make maximum returns possible'

Investing Rule 101 - High Risk = High Returns & Low Risk = Low Returns

Never forget the Rule of Investing.

Only after you have understood and digested this fundamental Rule of Investing that you should read further.

How should you Invest?

- Know your Risk Profile (How much risk can you bear)

- Invest in financial products that match your risk appetite by doing Asset Allocation

How to do Asset Allocation?

- We have attached the asset allocation table based on your Risk profile to help you understand how much you should be investing in debt & equity. Further, we believe that you all remember the Risk profile Questionnaire you took in the Workshop.

- A simpler method is to use your age to determine your asset allocation. If you are in the age bracket of 25- 35 years, invest 30% in Debt and 70% (100 - 30) in Equity. The rationale here is that the younger you are the more risk you can take as you would have a longer investment horizon and have a higher risk-taking appetite. While this appears to be a simple method, this is a crude method and risk profiling is the best way to arrive at your personal risk profile.

What Next?

Once you have determined your investments into Debt: Equity-based your Risk profile. Ensure that you maintain your Asset Allocation Ratio.

For Example:

This is how you begin your investing journey.

Now, given the current volatile markets, if after a month, Equity falls further down (which we are not sure of!), you must do Asset Allocation again.

This action of checking your investments and selling/buying as per your asset allocation is known as re-balancing your portfolio.

How often should you re-allocate/re-balance your portfolio?

You must re-balance your portfolio where your asset allocation varies by more than 5% from the desired Asset Allocation ratio.

How does this help?

By sticking to this rule-based allocation, all sentiment-based investments can be kept aside and you end up buying equities when they are cheap and selling them when they are expensive.

Equity - 03/31/2020