Investors must learn to invest

It seems as though some investors are hopping mad. They are accusing their financial advisors of giving them bad advice. They blame their friends for passing on dubious tips. They blame the stock market participants for manipulating prices, robbing them of the chance to make pots of money. A civil engineer is one of these angry investors. He says his mutual fund agent advised him to jump from one fund to another and he lost money in the process. One hires an agent when one doesn’t know much about investment. But what can one do if the agent gives him a bad advice? By the time he realizes it was poor advice, he would have already lost money.

There are dubious characters among advisors too, but can steer clear of them if the investor has done his homework properly. Make sure you get references and always go to a qualified professional. Don’t just go for the one who charges the lowest fee, as such people often depend heavily on agency commissions. They will sell products which fetch them the highest commission. They may also earn an extra commission when they ask an investor to buy or sell. These days there are lot of agents who try to pass themselves off as expert advisors. They just urge clients to keep buying and selling or they constantly pitch new products with an eye on the next commission. However taking the advice of an incompetent agent is only one of many common mistakes investors make.

One of the main reasons why people lose out on opportunities to earn better returns is that they aren’t always clear about the difference between savings and investment. Many people are happy that they have money lying in their savings bank account or fixed deposit. They think they have made a great investment, but that is not the case. They take great care to deposit money before 10th of every month to qualify for interest from the bank. But they don’t realize that putting money into a bank account is not an investment.

Of course, some people do know the difference between savings and investment. They carefully chalk out an investment plan and then fail to track it. One should maintain an investment diary. It should have details of investments, their maturity date, dividend date, photocopy of the application form, and so on. If an investor don’t know how much he earned from a particular investment, or when it will mature, it could lead to complications. For example, some investments stop earning anything after maturity, until the investor renews it or reinvest the returns. If he is not doing that in good time he stands to lose money.

Hoping for the best is well and good, but of course it doesn’t mean an investor picks any number he likes as the likely return from an investment. Many people believe they can pocket 100% returns from the stock market every year. They get into the market with this hope, and the moment there is small decline, they get scared and pull out the money. It goes without saying that they lose money in the process. They then proceed to blame everybody from mutual fund agent to the fund house to the market.

Investing in various asset classes such as equity and debt is a good idea but only if an investor is following a plan. Investment experts say investors often do this on an ad hoc basis rather than thinking it through completely. Many investors feel they must invest in the stock market because they heard from someone that he or she made spectacular returns from the market last year. They are so driven by the greed factor that they completely forget, for example, that they are going to need the money six months down the line. The first rule of investing in equity is: get into equity only if one has funds which he will not need in the next three years.