Are you the cool 90’s kid who thinks he/she has received the best of both worlds?
Well, we’re sure you have some amazing stories to share, which the Gen-Y kids can’t even think off. But in this article, you will know about the specific mistakes kids the 90’s kids made.
To set up the corrective perspective at the beginning of the article, I am a 90’s kid myself. I have made many common investing mistakes in the process of starting out in the investing ecosystem and still do.
This knowledge can provide to the user, a competitive advantage over other investors who commit naive mistakes in investing. It goes a long way in learning how to invest.
I’ll like to give my personal example here. Enthusiastic about and attracted to the stock market, mutual funds, investments and all the glamour associated with it, I, a 90’s kid, started out to invest a small sum of money.
Unaware of all the technicalities of the market, oblivious to the probability of potential loss of corpus and only pulled by the hope of sheer profits, I made some very common mistakes which many investors have already made in the past and will keep making in the future.
One of the most common mistakes young investors, especially the kids of the 90’s, make is taking free advice from anyone who says there is a possibility of making money.
Yes, that’s true.
Other common mistakes are investing randomly without any goal in mind, investing without any thorough research, and not having patience to remain invested for the long-term along with many more.
Here is an example of goal-based investing
This article is of help for anyone looking to start out investing in general and investing in mutual funds in particular, including those who are at the intermediate stage. It addresses everyone who is learning and/ or wants to learn the art of investing.
Some of the common investing mistakes which have been made numerous times by so many investors are-
One of the most important aspects about investing, which each and every investor must always bear in mind is to have an investment objective.
A well-defined investment objective is one of the pre-requisites of a successful investment. First and foremost, it helps to focus on and select the correct mode of investment.
For example, for someone who wants to set up a retirement corpus and is starting to invest early in the career, an investment in a small-cap fund could be a good idea.
However, for another investor who is only investing with the purpose to earn more returns than a regular FD and does not want to take too high a risk, an investment in debt mutual funds could be a better option.
It must be noted that in the second case, an investment in small-cap mutual fund could be highly risky and therefore over the risk appetite of the concerned investor.
Therefore, the investment objective is at the top-most level of the investment process and any investment related decision revolves around the objective of investment.
Many young investors, including me, missed out on this crucial aspect invested without any particular goal or time frame in mind
Since investing was not a huge phenomenon as it is today, many of the 90’s kids made a mistake. As soon as the market became volatile they would withdraw their money.
Rightly said, patience is actually a virtue, especially in the world of investments.
I would like to give my own example to better explain my point here.
I had invested in the security with a fairly medium to long-term view, knowing that the concerned security was volatile in nature but had a good return potential.
This particular investment started well with decent returns day-on-day for the first couple of days and I was happy of my decision to invest in this particular security.
However, this happiness was quite short-lived as the stock price began to fall down. It didn’t stop at that and the downfall continued for a couple of days straight.
There was a point in time wherein the price of the concerned stock was below my purchase price.
Although I became nervous and started to second my investment decision, I decided to remain invested for some more time.
The stock continued to be volatile, moving up and down around my purchase price. Then for a couple days straight the price fell to a point wherein I had 15% negative returns on my investment.
Disappointed on the notional loss that I had made and thinking of damage control, I sold the security much before my decided investment time-frame.
Fast forward a couple of years in the future, one day upon thinking of this particular investment, I checked the price of the concerned security.
To my utter surprise, if I had held on to the security until the decided investment time-frame it would have yielded me almost 3x returns. This return would have been even more than my expected return at the time of making the investment.
The lesson I learnt from this episode of investment is that one should be disciplined while investing and exercise patience, especially during periods of low returns. It is very natural and common for emotions to take over when things do not go as we had planned out.
If you have been trying to follow this trick. Stop it right now.
Nobody, absolutely nobody can time the market!
Many investors have made this common investing mistake. To put things to a comparative aspect, timing the market in order to make huge returns is something in which even many experts have failed.
One of the most important things to realize is whether one is a trader or an investor.
All investors must note that an investment is a long-term game of discipline and patience. Investors do a thorough research and take an investment call according to their risk appetite and investment objective and time-frame.
In comparison to an investor, a trader usually invests for the short-term.
The purpose is to time the market in order to benefit from the price fluctuations of the concerned security. It is important to realize that any attempt to time the market is very risky in nature and more than not may result in huge losses.
It is a high risk- high return game, not suited for everyone.
If we talk in cricket parlance, investment is a test match to be played with patience and not a T20 game. Investors must stick to the decide investment time-frame and not attempt to time the market.
Markets have forever been volatile and will continue to do so in the future as well. All young investors easily get lured by the prospect of making a quick buck, however, it is a common fact that most investors make losses while attempting to do so.
Investors must understand that volatility arises as the markets could be irrational in the short-term. However, as when time passes, the irrationality gets ironed out and securities reflect the true price and deliver returns.
What I learned is that an investor (one who is not a trader) should not attempt to time the market. Sustainable gains are, in most cases, made in the long-term investments.
To stress the importance of this aspect in any investment, I would like to write the age-old phrase: ‘Do not put all your eggs in one basket’.
Diversification is of utmost importance for any investment portfolio.
Many investors invest a major portion of their corpus in only one or two securities, without diversifying.
The problem with this type of investment is that if a particular security falls excessively, then the entire portfolio fails.
An investor should hedge his risk by investing with securities which are diversified. This will ensure that negative events in one security will not put to risk the entire portfolio.
It is advisable to invest one’s funds in a good mix of equity and debt funds. Where equity funds provide the scope of good returns, they also come with inherent risks of loss.
This is complemented by debt funds, which are less risky and provide stability to the total capital invested.
A good example of the case in point could be an investor who invested all of his corpus investing in bitcoin.
Now, this investor would have made astronomical money when the bitcoin was soaring new heights day after day to reach its life-time high in a matter of a few months.
However, the same investor would have probably lost almost half of his total invested capital in an equally short amount of time when the fall in bitcoin prices happened.
Such a situation is not at all desirable. All investors value stability in earnings and diversification facilitates this stability.
Many kids of the 90’s who enter into the world of investing, with a lot of confidence and positive attitude make this common mistake.
Filled with energy and desire to make a good profit in the industry, some investors act on other people’s advice.
The problem with this research is that an investment without a thorough self-research, solely based on another person’s advice could be extremely dangerous and counter- productive.
I would like to use my example to discuss the case in point.
When I started investing, I used to discuss investment ideas, market news with my friends. One day, during lunch a friend gave me this tip as to a particular security is expected to do very well in a couple of days.
Excited about that there was a potential money making opportunity and I was aware of some information which many others would not know, I invested in that particular security. It is interesting to note that I had never even heard about the concerned security.
The price of the said security at the market opening the next day and I got greedier. Not knowing anything about the stock, I remained invested and to my utter dismay the stock tanked drastically.
The lesson I learnt from this particular episode is that one should invest only after thorough self-study and only when have has enough conviction over the investment.
Any investment based on other people’s advice could put the investment in great risk.
The investment comes with its own set of risks. Investing is an art which can only be mastered through years of experience. Kids of the 90’s who are mostly beginning their investing life or are at the early learning stage make some common mistakes.
By keeping in mind these common mistakes and being careful enough not to repeat them again, investors could have a good start to the investments.
Financial planning such as consulting an expert, making and adhering to a financial budget, subscribing to an insurance plan and inculcating the habit of savings are a few must-have habits.
Each investor must access the risk-return trade-off before investing in any security. The ideal way to go about an investment is through self- study and gaining a conviction.
Nowadays, SIP or Systematic Investment Plan is a very good investment option for millennial investors, as it provides the benefits of rupee cost averaging and compounding from a disciplined long-term investing.
Moreover, the minimum amount of investment being very low encourages small investors with little disposable income to participate in this investment process.
It is convenient as the amount of SIP installment is automatically deducted from the bank account of the investor via the Electronic Clearing System. With the potential to create long-term capital, SIP is attracting attention and gaining huge traction.
Disclaimer: The views expressed here are of the author and do not reflect those of Groww.