Itâ€™s important for an investor to think through his goals and investments completely. Piecemeal decisions are costly in the long run.
A Major fall in the stock market never fails to rattle investors, especially newcomers. Let us take the case of TU who is no exception. He has been investing in stocks for barely a year, and found it hard to remain unaffected by successive declines in the market. He rushed to his agent and cancelled his systematic investment plan (SIP) in a mutual fund scheme.
TU decided to open a systematic investment plan in a tax saving scheme this year. The market was okay initially, but when it became volatile, it made him very nervous. So he decided to stay away from the market and called his agent to stop the SIP.
Itâ€™s not good investment acumen for investors to make important investment and financial decisions based on market swings. Sometimes, theyâ€™ll pull money out of their fixed deposit to buy shares when the market is at a peak. At other times, theyâ€™ll sell in a panic when the market is in the dumps. In both cases, they end up losing money.
It is not just stock investments and even other financial decisions are made similarly. An example is of a person who recently wanted to shift to a fixed rate home loan, from a floating rate one. He was advised against switching as the rate hikes were highly unlikely but he was adamant. Financial experts aver that such cases are largely due to a lacking of understanding and conviction.
Some people think of investing in tax saving scheme because a friend of theirs made a huge amount of money on it in last three years. This may not be the only reason he decided to invest in the stock market. To be frank, yes that was the deciding factor. People who donâ€™t understand much about the stock market and never thought of investing in stocks invest money when they see someone making money from it. Financial advisors emphasize the need to understand the product before investing in it.
Taking inspiration from people is fine, but an investor should also try to educate himself before taking the plunge.
Reversing or taking a decision in response to breaking news could prove costly. Listen to this story of an investor who decided to reduce the familyâ€™s medical cover when she learnt that the renewal premium had gone up by a few hundreds rupees.
She thought she couldnâ€™t afford it and was willing to go for half the cover, instead. This was risking her financial health just for four hundred rupees, but she was not convinced.
As luck would have it her husband had to be admitted to hospital for an emergency, and the insurance cover proved inadequate. The unfortunate investor had to pledge her jewelry to cope with the financial crisis.
Most people donâ€™t think through their goals and investments patiently. They make piecemeal decisions. One time they want to put in mutual fund scheme and another time they would think to save tax and decide to put some money in the Public Provident Fund. The most dangerous aspect of this kind of decision making is that one is unlikely to know the details of his investment and nor have a clear idea of the big picture.
The solution according to investment experts is to set different life goals first and then choose instruments that serve those goals. The rule of thumb is to opt for safer avenues such as fixed deposits and short term mutual fund schemes to achieve immediate goals. One can opt for riskier instruments like stocks, equity schemes of mutual funds to meet their long term goals. And last but not the least an investor need not be perturbed over short-term fluctuations in the market.