According to a recent study done by ISB Hyderabad, 2.02 million retail investors (25% of all retail investors) in India, make 0% return in the stock market. Even if your portfolio is in green, chances are your overall portfolio return is less than the FD returns. As more than 90% of retail investors cannot beat the fixed deposit return in India. But why so? We all have heard so many stories of people getting rich from the stock market. Then why it gets so difficult for the retail investors?
Here in this article, we will discuss the top 10 investment mistakes that retail investors like me and you are most likely to make. If you can avoid these mistakes and follow the best practices, you are bound to find success in your investment journey. So, let’s get started.
Mistake #1: Not having a long-term plan
The first major mistake many retail investors make is not having any long-term plan. Without a systematic investment strategy, they exit too early with a loss. This can be depicted by the churn rate. The churn rate simply means how many investors leave the platform. For example, if 100 people start investing in 2023, 90 of them will exit the market in the first year and only 10 of them will remain active in the next year. Among those 10, again 9 will leave taking a loss and only 1 person will remain who will stay long-term and make money.
So, if you don’t want to lose money in the stock market, have a long-term vision of at least 10-15 years. Don’t try to take all the risky bets thinking that you can make a huge profit in the first year itself. The only way to build wealth is to compound your gain over a longer period of time. For that, you must have a vision to identify good stocks and stay invested for the long term.
So build a strategy to sustain for a long period of time.
Mistake #2: Disposition effect
The disposition effect refers to the tendency of investors to sell their winning stocks soon and keep accumulating the looser stocks.
You must have many different stocks in your portfolio. Let’s say, you hold a good stock and that stock is giving around 15-20% profit, in most cases we sell that stock and book profit. So we are selling our winners. Similarly, there is another bad stock in your portfolio that is giving you a loss. In most cases, we tend to invest more and more into that losing stock without understanding the fundamentals behind it to average out the loss. We end up losing a lot of money due to this.
So the mistake we make here is –
- We sell our winners too early
- We keep on aggregating more losers
Few tips to avoid the Disposition effect:
- You need to know the entry and exit points of every stock. One useful indicator of an exit point is – Reverse Head and Shoulder Pattern. Of course, such a strategy might fail, but if you have no clue when to exit the stock, you will never be able to book profit at the right time and end up losing money.
- You must consider your overall portfolio return and not your individual stock return. Don’t get obsessed with turning all your loss-making stocks into profits. Make portfolio-level decisions.
Mistake #3: Getting married to a specific asset class
Don’t get to attached to a particular asset class. Stock or Equities is one asset class. Similarly, there are many more asset classes like:
- Crypto
- Real estate
- Gold
- Bonds
- Commodities
- Currencies etc.
Market dynamics change all the time. Depending on the macro economical factors, different asset classes will perform differently in different years. So, instead of sticking to a particular asset class, try to explore other asset classes as well. Find time to read about Cypto or real estate or some other asset class and gain expertise. So don’t hesitate to explore other asset classes and diversify your portfolio.
Mistake #4: Not doing your own research
Most retail investors tend to get influenced by social media influencers and act according to their advice. If you just simply google which stock to buy, you will find hundreds of stocks suggested by some so-called experts. It is absolutely fine to learn from different people and understand their viewpoints. However, if you don’t do your own research into it and start investing following their suggestion, chances are you will lose money. In the end, it is your money. You can not hold anyone but you responsible for your loss. So, listen to 10 different people, but do your homework thoroughly before making any investment decision.
Learn from other people, but act according to your rationale.
Mistake #5: Not discovering your own investing style
Like personality, every individual has his/her own style of investment. You must find what suits you best based on your strength and experience. For example, some investors prefer contrarian investing, where they invest against prevailing market trends to generate profits. Contrarian investors sell when others are buying and buy when others are selling. Investors like Mr. Warren Buffett prefer value investing, where they identify and invest in undervalued stocks at a discounted price. Then some investors exhibit a growth investing style of investment, where they simply identify good companies and hold them for the long term for a higher return.
So, it is very important to identify your strengths and find your own style of investment. If you are someone who is good at valuation, you can be a good value investor. But if you don’t know how to calculate valuation, then value investing doesn’t make any sense. Maybe growth investing will be the right style for you.
It is absolutely okay to mix and match multiple styles of investment in your portfolio. But, if you are mixing different investment styles without knowing any of those styles then you are bound to take bad decisions.
Mistake #6: Taking too much risk
Most retail investors spend hours identifying that one penny stock that will give them 100 % or more return. Or they tend to invest in some highly volatile stock thinking it will generate a good return. But the reality is often very different. When you invest in such high-risk stocks, chances are your investment will take a hit. Maybe one or two stocks will give you good returns, but many more will give you negative returns, driving your overall portfolio into a loss.
So, please ensure you have a well-diversified portfolio. Invest in good companies and don’t run behind stocks, that some influencers told you, would double in the next year.
There are many professionals whose full-time job is to analyze the stock market. Chances are, they will identify the penny stocks much before you and drive investment into that stock. It will no longer remain a penny stock.
Mistake #7: Trying to time the market
Timing the market is extremely hard if not impossible. We always want to buy at the lowest point and sell at the peak. But, the fact is, we can never predict those points. You buy a stock at a certain price and it may go down even lower. Similarly, you just sold a stock and the next day it can reach a new high.
So, don’t try to be a timing perfectionist while investing in the stock market. You will be much better off contributing consistently to your investment portfolio.
Mistake #8: Trading rather than investing
Trading might seem very lucrative, but it is also the easiest way to lose your money. The idea of making quick money is too intimidating to resist. Many media channels and telegram groups will tell you hundreds of bets to trade. One lucky day, you may even earn a few bucks. But on the very next day, you may end up losing all your money.
Trading is not a reliable strategy to get rich. It is the same as gambling. As a good investor, you should always stay away from such practices and rather plan for long-term sustainable growth.
Mistake #9: Failing to diversify enough
You must diversify your portfolio across multiple sectors and companies to properly balance your risk and returns. Changing market scenarios and macroeconomic factors can impact a particular sector or a company. If you have invested too much in a particular sector or a company, you are at a higher risk of getting impacted by such factors. That’s why it is very essential to adequately diversify your portfolio for better risk management.
Mistake #10: Not reviewing your investments regularly
Once you have built your investment portfolio, it is very crucial to review them regularly. Factors such as market dynamics, the company’s strategic goal, company fundamentals, macroeconomic factors, or even your own investment goal might change over time. So, it is very important to review your investments regularly (at least once or twice a year) and make small adjustments along the way to re-balance your portfolio.
I hope you find this article helpful. Let me know your thoughts in the comments. Happy investing 🙂
