10 Amature Investing Mistakes You Need to Avoid

Here’s another mistake many beginners make when they start investing. Uneducated guesses are like playing with fire, and you can get hurt in the money world. Just like how babies are naturally scared of heights and loud noises, most of our money worries come from what we learn as we grow up. That’s why it’s important to learn how to manage our money well and avoid getting hurt.

It is not necessary to have a college degree to succeed financially, but having a fundamental understanding of finance and investments is crucial. The most valuable investment you can make is in your financial literacy and yourself.

Becoming financially literate is vital for accumulating wealth and achieving financial stability. The personal finance community is an excellent place to start learning about personal finance, budgeting, saving, and investing. By taking the time to educate yourself, you can avoid common financial mistakes and make well-rounded decisions about your investments.

Remember, the best way to avoid getting burned in the world of finance is to be knowledgeable and prepared.

Creating a financial portfolio can be likened to a military strategy that involves a concentric labyrinth of defensive barriers, which are employed to surround and neutralize financial risks. In the Indian context, this strategy is similar to the ‘Chakravyūha or चक्रव्यूह‘ formation used in the mythological war of Mahabharata.

At the center of this formation is your emergency fund, which serves as the first line of defense against any unforeseen financial emergencies.

Many novice investors make the mistake of starting with unstable and high-risk asset classes, leaving them vulnerable to financial ruin if things go south. This is because they often lack a robust emergency fund to fall back on in times of crisis.

To avoid this, it is essential to follow a simple rule of thumb when creating an emergency fund:

• If you have a steady job, your emergency fund should cover at least three months of living expenses.
• If you have a contractual job, your emergency fund should cover at least six months of expenses.
• If you are an entrepreneur, your emergency fund should cover at least a year’s worth of spending.

By ensuring that you have a sufficient emergency fund in place, you can protect yourself against unexpected financial emergencies and make informed decisions about your investments.

Additionally, it is essential to educate yourself on financial matters and continuously work towards improving your financial literacy, as this will help you make informed decisions and build a more secure financial future.

It is important to understand that each investor has a unique level of comfort when it comes to taking risks. Apart from identifying the securities to include in your portfolio, your risk appetite also influences the distribution of your funds among other asset classes, such as equities, debt, real estate, commodities, and art.

Unfortunately, many investors pick securities without assessing their risk tolerance. To invest successfully, you need a balanced risk-taking capacity, which is determined by a thorough risk evaluation of essential factors such as your current net worth, financial objectives, the timeline for achieving those objectives, dependencies, and job security.

Before making any investment decisions, it is crucial to assess your risk tolerance to avoid making poor choices that could lead to financial losses.

The level of risk you take with your investments should be determined by the length of your investment horizon. If you’re looking to build a retirement nest egg, investing in safe debt instruments yielding a 7 percent annual return won’t be sufficient. This is because retirement is a long-term goal that requires a long-term investment horizon.

In India, where the annual average inflation rate is around 7.5 percent, investing in low-return instruments won’t help you achieve your goal.

Unfortunately, many investors repeatedly make this mistake because they don’t understand the concept of absolute returns and time horizons. On the other hand, if your goal is just a year or two away, such as getting married or going on a backpacking trip with your significant other, investing in highly volatile equity instruments with an expected return of 14 percent would be a risky move.

It’s essential to understand the direct link between your investment horizon and your goals. However, many young investors take on too much risk without fully comprehending the consequences. Therefore, it’s crucial to evaluate your investment goals and horizons before investing your hard-earned money.

The saying “What’s better to be 5 years too early, than 5 minutes too late?” emphasizes the importance of being prepared and proactive in various aspects of life, including insurance.

One aspect of being financially prepared is having adequate insurance coverage. Insurance is often referred to as risk management because it helps manage the financial risks associated with unexpected events, such as accidents, illnesses, and other emergencies.

Without sufficient insurance coverage, your financial portfolio could be vulnerable to significant losses in the event of an unexpected event. Insurance acts as a safety net that can provide financial protection against various risks, including health issues, life events, and general calamities.

It is important to remember that insurance is not an investment. While some insurance products may offer returns, such as endowment policies, they are often less effective than standard policies that are specifically designed to provide insurance coverage.

In short, having sufficient insurance coverage is crucial for anyone who wants to be financially prepared and protected against unexpected events.

It’s essential to recognize that investing should be a rational decision made with a well-thought-out plan and a clear understanding of the potential risks involved. Unfortunately, novice investors are often tempted to make rash decisions due to a variety of factors, including greed, bad advice, and fear of missing out.

One common mistake that novice investors make is putting money into the stock market that should be reserved for emergencies. This money, known as an emergency fund, is intended to cover unexpected expenses, such as medical bills or car repairs. Investing this money in the stock market is extremely risky, as the market can fluctuate wildly, potentially leaving the investor without the necessary funds to cover emergency expenses.

The reasons why investors might be tempted to gamble with their emergency fund are varied, ranging from greed and overconfidence to fear of missing out on potential profits. For example, a novice investor might hear a stock tip from a colleague with a track record of success and be tempted to put money into that stock without doing their research.

Alternatively, they might be drawn in by the promise of quick profits made by investing in the latest financial product advertised on TV.

Regardless of the reason, it’s crucial to remember that every rupee invested should serve a specific purpose and be part of a larger investment strategy. Investing in the stock market should never be a gamble or a way to impress someone. Instead, it should be a rational decision made with a clear understanding of the potential risks involved.

Finally, investors should always keep in mind the golden rule of investing: never invest money that you can’t afford to lose.

When it comes to selecting investing assets, many investors make the mistake of primarily considering the previous year’s return. However, it’s essential to recognize that past performance does not necessarily guarantee future outcomes.

The economy and market conditions are continually evolving, which means that assets that performed well in the past may not continue to do so in the future. Relying too heavily on recent performance to make investment decisions can be a costly mistake.

It’s critical to consider past performance in conjunction with your overall investment strategy and goals to avoid developing tunnel vision.