5 stock investment mistakes to avoid

Personal finance planning deals with money management by oneself to fulfill personal objectives of money demand in the future and for upcoming bigger tickets. Ending up taking too much risk for a given term and withdrawing when the portfolio falls to unbearable levels or hold on to an underperforming instrument for long term without considering the opportunity cost of investing. A financial advisor is incumbent to protect from the financial disgust.

Thanks to SEBI differentiating advisors and distributors because both recommend schemes, the advisor do it for good of the client and distributors do it for their sales commission.

5 equity investment mistakes common people do and blame the market for being irrational.

Trading in and out:

Buying and selling stocks based on the price fluctuations are speculating without technical analysis. Profiting after an intense analysis of the charts the probability of winning the trade is rock bottom. People with less emotional intelligence and weak hearted should stay away from direct stock picking. Without prior knowledge of the market or the stock will soon burn fingers on every action of the market participants.

Trading in and out is making money for your broker and he is not your friend. Back in days markets were operationally inefficient, trading charges were a hefty 1% of both buying and selling.

Tax and commission:

Investors ignore taxes and commissions that are part and parcel of investing. Net of fee and commissions are the appropriate parameters dictate the returns of a portfolio. After all these drags, comes the tax to pull the return even more to the ground. LTCG or STCG sits on every cash counter. Direct and regular plan fees on a mutual fund investment vary largely when the investment horizon extends, consuming significant part of the gross return.

Two things are sure in life. Death and Taxes.

Commissions are hefty charges with most hidden and some straight to the face frowning. One best example for worst commission cuts is ULIPs, eats up premium payments and charges on insurance, equity investment services.

Timing the market:

Getting in when the market is trading at maximum optimism getting out when the market is out of cash. This is heard mentality, people have lost too much by doing what peers had done with their positions. The one who acts upon his convictions drive the market, the rest are waves of the former actions.

Timing the market is selling time, has been echoing on all sound investment books to stop participants from going with the market trend. A couple of quotes can make any investor realise timing serves no purpose in the stock market.

The stock market can remain irrational longer than you can remain solvent.

John Maynard Keynes

Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.

Peter Lynch

Lack of diversification:

Diversification attributed to personal finance has less options. Investment vehicles like Private equity, Infrastructure and commodities require knowledge of risk and higher initial outlay. The most common and accessible physical assets are real estate and Gold, now equity is being added as a diversification. Keeping equity as major part of the portfolio and gold to be the next significant part will be worthwhile as these two assets are negatively correlated. If an investor is planning to beat inflation, real estates are not the go, commodities can help in beating inflation but the ease of trade is low. Professional money managers diversify within the same asset class to maximize returns or control risk.

Instead, go for a low cost index fund with no redemption until retirement. Mutual funds are better if the investor knew how they operate and limitations of performance parameters.

Mutual Funds VS Index Funds VS ETFs

Penny stocks to buy:

Cheapness in the market jargon specifies the price that is unreflected, that an asset intrinsically holds. When markets are less efficient, participants trade only on hot stocks that shuns the boring stocks out of the league. The major part of the market is untouched, implying the stock prices fail to reflect the inherent value of the business. For a billionaire, million is cheaper. In the stock market to use the word cheap, a researcher has to dwell on loads of data, crunch numbers, after intense research factoring all the activities of the business to arrive at a number that is expected to represent the value. No surety, the number would be right to act upon. The mended value is then compared to the market price, if the market price is lower than the processed value, the stock is said to be cheap.

Penny stocks are cheaper relative to personal income, not to the market.

If market efficiency holds, penny stocks are priced legitimately. Don’t buy into stocks that are cheap for you, buy stocks that are relatively cheaper fundamentally.

Buy into quality companies and hold. Doing a SIP in index funds is the best alternative to gain market returns without being directly involved.