There are a few wrong way of thinking about investment which result in why individual investors often fail miserably. It is good we know them and avoid being one of such investors.
Here are six common fallacies about investment:
1. ‘I am too young to plan for retirement’
Have you started planning for your retirement? You may be thinking: “Who, me? I am just 20 why should I be thinking about retirement”. It is not so. Rethink. You should have rather started thinking about it yesterday, because time flies quickly.
If you were smart and planned for retirement while you were young, your retirement years will be really those ‘golden years’. If not, you will need to compromise and work for a longer period of time, retiring later compared to others.
2. Stock markets can yield quick money
This is a another fallacy. Stock markets reward long-term investors. In stock markets, money is transferred from investors who are fearful and greedy to the investors who are balanced and rational. This is the simple truth.
You need to be calm, patient, disciplined and rational. You don’t have to be smarter but more disciplined than the rest.
3. Fixed Deposits(FDs) and Treasury bills(TBs) are the safest and best
There is nothing wrong in investing in fixed deposit (FD) or Treasury Bill (TB) . FDs are really safe and give us fixed returns. But this does not mean that investing all your money in FDs is a good idea. FD will hardly beat inflation at the long run. And if your investments are not beating the rate of inflation, your money is losing its purchasing power. TBs and FDs are safe but not always the best option.
4. I can never be as good as Warren Buffet so why try?
lol…says who? In the words of Warren Buffet: “Success in investing doesn’t correlate with IQ once you’re above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” You don’t need a super brain for making investment decisions. You only need common sense and discipline. If you don’t have enough time and expertise, you can get assistance from professionals.
Also, investors often spend a lot of their time in trying to figure out when the market is very low or high, to be able to time the purchase and sale of investments accordingly.
In other words, investors want to exit when the market has reached its top and enter when the market has just reached a bottom. This is not a practical idea because there are so many factors that influence the markets. Predicting all the factors and making investments is practically not possible. Instead,stay invested for a long term.
5. There is no such thing as too much diversification
Diversification is needed but don’t over diversify. Having more than 20 stocks or investments can dilute your returns. The reason behind this is you are not only investing in best stocks or the best of investments but also in average and above-average ones. Therefore, your returns are likely to come down. You need to rather concentrate on fewer investments. It is possible to achieve the required diversification with a few but solid investments.Andrew Carnegie said:”The wise man puts all his eggs in one basket and watches the basket”.
6. The best way to make money is investing in what is hot
If you are investing in what is hot then you are following the crowd. And if you follow the crowd, you will get what others are getting, and not anything more. You need to be fearful when others are greedy and greedy when others are fearful. Don’t go by the market trend or the hot pick of the month. Instead, think like a “contrarian” and follow value investing.
You will be an assured successful investor if you could avoid these investment fallacies.
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