7 Common Mistakes that Destroy your Wealth Creation
- Many investors take investment decisions without any long-term financial plan in mind.
A long-term plan is based on life goals, assets, liabilities, income and expenses.
Example: goal to accumulate Rs 10 crores by retirement (age 63), goal to accumulate Rs 15 lacs for child’s higher education by 2025
- Short time frame. Many investors take investment decisions with a time horizon of few weeks or months.
Investments, particularly if you are buying equity stocks or equity funds need to be made with at least 5 years in mind. The longer the time frame, lesser will be volatility of returns, higher will be the predictability of returns. Hence, taking investment decisions with a long-term goal in mind is always recommended
- Investing without understanding the risk profile.
Every investor has a unique capacity to take risk. A risk profiling exercise is a must-do before starting to invest. Investing without a risk profiling exercise is like firing bullets in the dark.
- Investing without an asset allocation plan
An asset allocation plan defines the allocation of money between assets and is a base for wealth creation. No wealth creation is possible without a scientific asset allocation plan.
- Investing without periodical portfolio rebalancing.
Rebalancing is the process of returning your portfolio to its target asset allocation as outlined in your investment plan. Rebalancing forces you to sell the asset class that is performing well and buy more of your worst performing asset classes.
- Copying others, looking for quick tips. This is the most universally practiced habit of investors.
Every investor is different with different goals, investment styles and investment needs. Copying somebody is a dumb thing to do in investments as what’s good for that person need not necessarily be good for you. It may in fact be unsuitable for you.
- Only Plans…NO ACTION! Many investors are diligent and good at doing long-term planning, but they hesitate to execute the plan.
At the end of the day, it is ACTION which counts as the journey to wealth creation starts by acting upon a long-term investment plan.
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