You must have heard the saying Rome wasn’t built in a day. The same theory is applicable to habits: Deeds are not turned into habits in one night OR one month or even in one year. It’s a continuous process.
Investment habits too require a lot of dedication and perseverance to get changed. Investment habits depend upon an individual’s finance knowledge, attitude towards handling their finance, their expenditure and saving pattern and ultimately their desire for the financial peace.
One can work on following habits which are very common in Indian investors. Let pledge to change our most common bad investment habits in this New Year.
Have this as your Financial Resolution for the year 2020 !!
Doing random investing instead of Goal-based investing: This is a very commonly found habit in us. We invest our savings without giving any thought on our goals. And just invest in whatever ways we find comfortable to do. It is very important to identify your life goals and invest accordingly instead of random investing. One should segregate their life goals in the short term, medium-term and long term duration and invest accordingly.
Saving the remaining amount after spending: Instead of going by this formula, Income- Spending = Saving. Apply this formula in the coming year: Income- Mandatory Savings= Spending. It is very important to set your monthly saving rate and stick to it, prepare a monthly budget, knows about your spending pattern and segregate in NEEDS and WANTS. Give preference to saving and then spending and know your cash flow.
Neglecting hedging life risks before starting investments: Many times retail investor start investing and neglect hedging the life risks. One should set aside emergency fund equivalent to 6 months monthly expenses plus all EMIs in most liquid financial products. Take adequate term plan for self. Take adequate health cover for self and all family members including parents apart from the health plan provided by the employer. Once these 3 things at a place then start investing for your life goals.
Mixing insurance and investment: This is the old age investment habit of Indians. Common man makes this mistake often. They get trapped in misselling of insurance agents and buy traditional plans such as whole life, endowment, money back and even ULIPS. One should take Term Insurance for life insurance need and mutual funds for investment purpose to create wealth in the long run. Just buy a pure vanilla term plan with no riders attached for your insurance need.
Not following self-risk assessment before starting investing: It is very important to know which type of investor are you. Whether small fluctuation in sharemarket increases your heartbeats then it better you stay away from equity. So before jumping in any Stock recommendation from friends and relatives see whether that suits your investment style or not.
Considering Equity for short term investments too: It is very important that common investor should know that equity investment makes money only in the long run. If you have 5+ yrs life goals then only add pure equity in your portfolio. Never invest in any equity mutual fund just to see its last year performance. Mid and small-cap funds are good for 15+yrs life goals and that too as your satellite portfolio. Build your core portfolio around nifty funds, hybrid funds, large-caps and multi-cap funds.
Getting into the debt trap. Most of us are overburden ourselves by different types of loans and their outgo can be a headache for us if we had not given a thought before adding up that debt. Please never take any expensive loans to fulfil your aspirations. Ideal Debt to Income ratio should 30 to 40 % inclusive of all debts. The debt more than this limit will hamper your saving and investments.
Keeping all your eggs in one basket. : Always invest according to the asset allocation decided by you after assessing your risk profile, your current age and a time frame of the goal. It is very important to have different types of asset classes in our portfolio. Never be overinvested in a single asset class. Allocate your investible surplus(savings) in different asset classes such as cash, equity, debt, real estate and gold according to your age and time to life goals.
Relying on a single stream of income: We work very hard in our job and business to get that steady flow of salary or business income. But is that income is secured and guaranteed? NEVER rely on only one source of income. You must find ways to create passive income for which do not even need to work actively for that. Make your money work for you too..
Chasing returns instead of focusing on the Corpus required to be accumulated: Common man always runs after returns on the investments he wants to make. Returns are not in your hand. What is in your hand is saving more, spending less, invest wisely and control your GREED and FEAR in investments. Focus on these things. focus on the corpus you want to accumulate and try harder to fund it seriously. Returns you earn on your investments should be considered extra. It is an ICING on the cake
Above are some of the important bad investment habits which we are doing since long. We can make changes in our financial habits by reading about financial planning and following those who implement the correct way of investing. I always believe if one gathers knowledge about Personal Finance and be disciplined about investing in longer-term, one can create wealth and have a peaceful financial life.
Knowledge and Discipline lead you to financial peace!!!