Aggression in Investments – Danger

Making up for lost time and catching up are great ideas, but when it comes to financial planning and investments, it is often impractical. People think they’ve lost five or ten years end up taking the wrong steps to make up for lost opportunities. In fact, they become excessively aggressive and may land in big trouble. There is an example of an investor BL, who has suddenly started investing in equities and eats, sleeps and breathes “stocks”. People like him start speculating in the market and are exposed to substantial risk.

Indeed, that is exactly what BL plans to do. He has been a good saver and plans to save even more, and also invest in stocks. He has implicit faith in his financial advisor who has promised me better returns. How can anyone promise better returns, when the stock market doesn’t guarantee them? On this BL is confused.

His financial planner (FP) said he had only offered the idea as a suggestion because BL doesn’t have enough money nor can he save than he currently does and therefore suggested BL could invest in stocks. Such a move will enhance BL’s corpus as stocks can beat every other investment in the long run. FP was not serious on his suggestion.

FP had also not told BL about the risks involved. For example, if the market crashes BL could get negative returns, perhaps even lose his capital.

Someone who is close to retirement need not stay away from stocks totally but it is important to stay within bounds. Just because one didn’t benefit from stocks all these years, he shouldn’t lose focus. Stocks can give better returns, but could be extremely risky in the short term. For example older investors can stick with large cap schemes, which invest mainly in frontline stocks.
Let us take the case of considerably younger SS who’s set to drive head first into risk. Such young people suddenly get aggressive and start investing in equity in a big way. They’re often blinded to everything else by the thought that they lost an opportunity to make money. They feel this is their chance to catch up. But they should remember that it takes emotional and financial skills to succeed in such investments.

Talk to anyone in Stock Market and one can hear impressive stories about how someone identified a stock much ahead of the market and made huge amount of money. But ask about their failures and nobody has any story to tell. The answer is simple. They are lying. If they tell that they also made mistake, nobody asks for any tips. If potential investors are dealing or intend to deal with such characters, they would be doomed. Their intentions may be honorable, but they are ignorant about the market. In their euphoria of making money from stocks for the first time, they are forgetting that investing in stocks is not that simple. A professional Stock market investor analyses the companies’ balance sheet, P&L a/c and determines the stock where investments can be made.

One comes across many people who have lost their entire capital trying to make money through aggressive trading. Newcomers in the market, especially those who deeply regret that they lost out, often fall into the trap. It’s not so easy to make money from the market. If you start to buy and sell stocks on the basis of tips or news, you will probably make some money, and also lose some. And the chances of losing money are greater. The only way to make money in the stock market is to invest in quality stocks, with along term horizon. But misguided investors’ aggression is not limited to stocks. Some people take on huge liabilities without even being conscious that they are doing so. Feeling left out is such a strong motivator, that people who bought real estate without thinking about their capacity to repay the loan. Real estate is another area besides stocks, where people make such mistakes.