Investors top 3 wealth destruction mistakes – Decoded

One of the greatest learnings in life is having the clarity of what not to do!

Starting off the new year, sharing some of the most critical lessons, related to investing and creating wealth.

If you can keep away from these 3 mistakes, you will be well on your path to successful investing.

• Selecting funds on the basis of past performance – many investors I have met have stated that selecting a top performing fund (over the last 1 year) is the most important thing in investing.This couldn’t be further from the truth. A seasoned investor will understand that the market (and all underlying themes) moves in cycles. What goes up must come down. This is where long term average return over 7 years or more becomes important. During this 7-to-10-year period the fund would have seen 2 to 3 market cycles and the investor will be able to see how the fund performs across these cycles. If you measure the funds success over the longer duration you set the right expectations for yourself. The right expectations are the key to successful investing.
• Not understanding risk and returns are entwined – A smart investor will understand that every 1% of return, over the government bond rate, comes with 3% higher risk. Unfortunately, some investors approach investing with the thought that high returns are possible without taking too much risk! This lack of understanding has cost many investors sleepless nights and terrible investing experiences.
• Trying to time the market – over the last 22 years in the industry I have only seen people “trying” and never actually succeeding! Nothing has been more detrimental than to redeem all investments and sitting on the fence waiting for the market to fall. When the market finally does fall, I have never seen the conviction in an investor to actually invest – because there is always further scope for the market to fall! Research has constantly shown that even if one was incredibly successful at timing the market (which is impossible) then also the CAGR difference in long term return would be marginal. Selling high and buying low just sounds good on paper. In reality it’s always selling midway getting anxious when the market keeps rising after you have sold, getting scared when the market falls expecting it to fall further, seeing the market rise again and then finally buying at a price much higher than what you sold at. This is the harsh truth!

?So, what works?

Having the right expectations, understanding risk adjusted return, discipline and process-oriented investing, having clearly marked goals and investing with purpose!

All these things significantly contribute to managing perseverance in volatile markets – remaining invested when others are panicking.

Remember, the stock market is a machine which transfers wealth from the impatient to the patient, from the weak to the strong (behaviourally) and from the indisciplined to the disciplined.

Investing is easy, creating wealth isn't! At FinEdge we understand the importance of technology, convenience, process & goal orientation, discipline and expert investment managers are all critically linked to an investors ability to create wealth. Miss a single link in the chain and there is a huge degradation in a persons ability to invest successfully!

FinEdge - Invest with Purpose