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Things you must avoid in investment planning

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DOING better than others is a common human tendency. However, when it comes to savings and investments, people sometimes get the parameters wrong.


We will discuss here, some of the common myths/mistakes.


No competition about higher returns: If your friend or neighbour has made above-normal returns on his/her investments, it could be due to the fact that he opted for a high-risk investment, which has paid off so far. But it could have gone the other way or may go the other way in future. Investments are for meeting your financial goals and not for beating your friend or neighbour in terms of returns.


It is desirable not to discuss personal investments with others. Having said that, if someone is not availing the services of a professional financial adviser, then it is good to exchange ideas on investment avenues for the sake of enhancing knowledge/awareness. Keep it limited to that, do not discuss the returns you have earned or the amount you have invested.


Myth of best investment: There is nothing as the best investment. If there were, for example, an asset category that provides returns higher than other categories but with a lower risk or lower volatility, people would have invested in that category only, ignoring other asset categories. Momentum can drive a market for a brief period, but sometime there will be a breakout. The relevant term here is not `the best' but `the most appropriate'. Investments should be appropriate for the risk appetite and horizon of the investor. Chasing the `best investment' is speculation, not investment.


Timing the market: People want to enter when the market is at its lowest and exit at the peak. While the intention is understandable, the problem is, nobody in the world knows the exact bottom and exact peak. There is a saying that the best time to invest is when you have money; if you have savings every month (from the monthly earnings), you should save every month. Timing may be done to a limited extent by investing in a market when it is towards its historical bottom and exit when it is towards its historical peak. Savings and investments every month automatically leads to rupee cost averaging and does away with the temptation to time the market.


What then, is the right approach?


The age-old canons of discipline and systematic approach to investments still hold good and will always remain relevant. It does away with the emotional aspects of investments. Emotions should be attached with the goals of life and not with financial savings instruments for achieving that goal. Systematic approach means, inter alia, investing regularly at proper intervals and maintaining a proper allocation ratio. When there is a rally in one market, say for example the equity market, the allocation to that market goes up due to the higher valuations and for maintaining the desired allocation, offloading part of it leads to profit booking. On the other hand, in a bear equity market, the need to maintain the allocation necessitous maintain the allocation necessitates purchasing more of that asset, which leads to acquiring more at lower valuations.

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