It is an open secret that equity is the only asset class with the potential to compound your money faster so that you can build a sizable corpus for goals such as children’s higher education and retirement, among others. While many investors start equity investments with gusto, they fail to leverage the full potential of this asset class because of their actions arising out of ignorance or inexperience, that mess up the entire game. And the irony is that these are repeated time and again.
So, where do investors go wrong with their equity investments? Let’s find out.
Investing without knowledge or professional help
Equity investing is a skill which, at the basic level, requires an understanding of the company’s business, competition, and financials. At a deeper level, it is crucial to estimate the fair value by analyzing its key metrics. The task is humongous and challenging in equal proportions, as doing so is not everyone’s cup of tea. Help is at hand with most brokerages authoring research reports for their clients, yet decoding such reports, full of technical jargon, is a herculean task for most investors.
Seeking professional help by engaging a competent financial advisor can make matters easy. The most accessible and affordable option is to invest in diversified equity funds.
Following the Herd Mentality
Legendary investor Warren Buffet has said: “Be fearful when others are greedy and be greedy when others are fearful!”. Data shows that investors do the opposite, and the reason for this is herd mentality. There are reasons for doing so. Equity is risky and uncertain. Going with the crowd gives the much-needed comfort and a feeling of safety. However, this strategy is sure to backfire because if something worked for your peers and acquaintances is no guarantee that it will also work for you.
When the pandemic set in and lockdowns were imposed, many investors took to stock investing as everyone did. An astounding 14.2 million demat accounts were opened in FY21. This data bears testimony to the tendency of herd mentality.
Reacting to Market ‘Noise’
With the advent of social media, everyone out there seems to have donned the hat of an expert doling out free advice to lure innocent investors. All kinds of information exist, from stock analyses to market
predictions to economic forecasts. Investors get carried away by the ‘noise’ around them and are tempted to react to every piece of information. Failing to block such noises, they find themselves in a tight spot. This also comes in the way of developing patience and discipline, a must for equity investing. Legendary investors have often promoted the buy-and-hold approach to equity investing which effectively takes care of all distractions.
Failing to Diversify the Portfolio
Investors who have tasted success by investing in a particular stock or a sector create a comfort zone and fail to look beyond. This leads to a skewed portfolio that can quickly erode if there is any adverse development. It is prudent to spread the investments across stocks, sectors and among large, mid, and small caps. While mid and small caps can fuel returns, large caps provide stability.
Every mistake in equity investing can prove costly; hence, it is imperative to keep them to the minimum. Investors must, therefore, learn not only from their own mistakes but also others. Investors who fail to do so must remember that equity markets are a good teacher, only that they may have to pay heavy fees to learn a lesson or two.
Source: Zee Business