1. Lack of Financial Plan and Budget - Some of us make random investments with no sound plan in mind. We buy some stocks on the basis of some ‘friendly tips’, make some last minute investments towards the end of the financial year to save on tax without really understanding what those investments are and whether they are suited to our financial profile. We should make a financial plan listing out goals, income, expenses, dependents etc. on the basis of our risk profile and then execute the financial plan.
It is also important to have a budget in place and stick to it. If this is not done strictly, we could easily spend beyond our means in unnecessary things and will not have money for important things like buying insurance.
2. Making Investments without really understanding them - Of course, you do not have to be an investment whiz, but you should be aware of the instruments, assets or businesses that you are investing in. Understand the market for it, the returns expectation or how the business is organized. If you are not aware, you should make an effort to learn more or avoid investing in it.
3. No Diversification of Investments - You need to make investments in different kinds of assets depending on your returns expectation and financial goals. If you invest only in 1 or 2 types of assets, and there is a downtrend in that asset market, your financial plan will backfire and you will be in a losing position.
4. Family is unaware of the financial state of affairs - Many a time, only one person in the family is aware of the financial status of the family. It is normally the person who does the investments. This has to be avoided, as life is unpredictable. More than one person in the family should know all financial details like insurance claim and medical claim details. Physical assets like investment documents, gold, bond certificates should be kept safe and secure and at least one family member should be aware of the details. Banking and Demat account passwords should be kept secure but there should be a way for someone trustworthy to be able to access them if required.
5. Holding on to non-performing investments - We put money in investments which do not perform well, either based on some professional advice or based on our own research and analysis. But the decision could backfire and the investment may not perform as per expectation. It could also happen that the asset class was on a bull run for a temporary period and then is priced by the market to its real value. Many of us make the mistake of holding on to such useless investments, thinking it will bounce back in the long run. It is better to admit our mistake, sell the non-performing investments and use that money to invest in some better quality asset.
Investment of our hard earned money is critical for our as well as our family’s future and we should ensure that our investments work just as hard as us. Therefore we should avoid costly investment mistakes.
Summary – It is important to have a sound investment plan in place and ensure that we do not make the following mistakes while investing our hard earned money –
1. Lack of financial Plan and Budget
2. Making Investments without really understanding them
3. No Diversification of Investments
4. Family is unaware of the financial state of affairs
5. Holding on to non performing investments