Three investing blunders an investor should avoid

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Summary

  • Most investors fail to understand the importance of asset allocation and often regret it when the tide turns against them.
  • For an investor, more focus should be on the quality of the business and less on its price.
  • An investor must avoid noise, which leads him to make numerous mistakes such as exiting prematurely on someone’s tip.

In an attempt to make it big in the financial markets, it is essential to know what should be done right. However, more often than not, knowing what not to do while investing pays equally well in the long run (if not more).

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There have been so much on the subject of investing with the right attitude and approach. But investors should also be careful about the blunders that most of them make and apparently stop themselves from achieving desired returns.

These investing blunders may range from psychological mistakes to analytical mistake to even bad financial habits that may ruin years of hard work in a short period. Let’s have a look at some of these investing mistakes that an investor must avoid in order to save himself from the risk of ruin.

  1. Ignoring the importance of asset allocation

Asset allocation is one of the most effective ways to reduce the overall risk of the portfolio significantly. An investor must have a diversified portfolio to avoid the concentrated risk of any asset he owns.

Right asset allocation calls for a good understanding of the assets an investor owns and their inter-relationship. There is no hard and fast rule to it, and it entirely depends on the personal objectives of an investor, risk appetite, time horizon etc.

Most investors fail to understand the importance of asset allocation and often regret it when the tide turns against them. Therefore, its always advisable to be prepared beforehand and save the portfolio from concentrated risk.

Read More: Three golden rules for investing in your 20s

  1. Attempting to time the markets

There is a common saying in the market that one needs to time the market to become a successful investor. This may be true for a short-term trader as he capitalises on the price movements, so timing becomes an integral part of the trading.

However, it may not hold that much relevance for a long-term investor. For an investor, more focus should be on the quality of the business and less on its price. As the time horizon is quite long, even a slightly expensive price would reap decent returns if the quality of the business is top-notch.   

Also, in an attempt to wait for a dip to get in (timing), it may result in the loss of an opportunity if the dip didn’t come as per the investor's expectation. If the price seems too expensive, an investor could buy smaller quantity and then he may wait for the dip to add more.

  1. Getting influenced by noise

It is not a hidden truth that in the financial journey of an investor, he comes across numerous individuals and groups of people who approaches him to give a stock tip or a recommendation. Sometimes, an investor himself goes out and looks for seemingly intelligent and knowledgeable people or even “market experts”.

All these stock tips or recommendations, free advice or irrelevant information related to stocks creates noise in which he gets trapped and influenced. This noise then dictates the decision-making process of the investor.

This noise leads an investor to make numerous mistakes, such as exiting prematurely on someone’s tip or buying the wrong company. It's not wrong to take advice, but an investor needs to understand that nobody knows what will happen and that it’s always advisable to do your due diligence and take responsibility for your own decisions.

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