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Wealth creation needs patience and proper planning

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All human beings make mistakes. So it's natural to expect that retail investors would also make mistakes when they invest. In fact, there are higher chances of retail investors making mistakes because they rarely get the kind of training and experience professional fund managers have.


Over the years, studies in behavioural finance as well as observations by financial planners and advisors have listed several types of mistakes that retail investors make while investing. Some are due to a lack of proper knowledge about the working of the investing process, some due to pre-conceived notions, some due to influence of friends and family. Some of the common mistakes are investing after looking only at the features of a product, not considering portfolio allocation and going for a concentrated investing approach, ignoring the impact of inflation on one's portfolio, investing only to save taxes, and trying to time the market, among several others.



All retail investors are faced with a lot of challenges as far as investment decisions are concerned. These investors may not have enough knowledge of the investment products they are investing in and they may be shy to avail themselves of the services of an experienced financial advisor, which in turn may cost them very dearly in the long run. Also, they are reluctant to deviate from their original investment plans. Retail investors should put in place a good portfolio, constructed and maintained with adequate rebalancing and restructuring, which is often necessitated by market conditions.


Often retail investors fail to appreciate the fact that money moves from active to patient investors. Due to the lack of this knowledge, investors act in haste and lose out on the chance to create wealth in the long run. At times, investors tend to go for what is often called a rearview driving: Their investment decisions are based purely on past performances, and which may not be the right thing to do. The investor of today does not profit from yesterday's growth. Many a times, investing decisions by retail investors are based on rumours and market tips. Such decisions often end with disastrous consequences, leading to huge losses for the investors. In most cases, such decisions are influenced by the actions of friends, family members or acquaintances, and should be avoided, say financial advisors. The same holds true for speculative bets.


Speculation and trading need nerves of steel, long years of market experience and strict discipline. It is also a full-time job. If you do not have all these, then trading and speculation is not for you. If the above points are adhered to by retail investors, they can succeed in achieving their life's financial goals through saving and investment.


New research in behavioural finance points to flawed investor psychology as one of the main reasons for retail investors to not create as much wealth they would have otherwise acquired. Although conventional investor education initiatives go some way in educating retail investors about the investing mistakes they commit, however, new findings uniformly suggest that investor education must include a strong dose of applied psychology and alert the investors to the well-documented psychological biases that affect judgment when one trades on his/her own. Such an investor education approach is still missing from the investor education courses that are currently available in our country, De points out.


While academics and practitioners in the field feel the need of the hour is to put in place such a financial education system, they also agree that it would be a huge and complex task. Such an initiative should also involve all the stakeholders, including the government, regulators, stock exchanges, financial media, investors' associations and the academia. The enormity of the task that has serious wealth implications for millions of investors should not be a deterrent… The basic focus for all such initiatives should be to sensitize retail investors about the psychological aspects of investing and trading.

 

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