Investors often believe that they are far better at investing than they actually are. Without having a second thought, they keep taking decisions solely on the presumption that their decisions would eventually turn out to be right.

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What we do not realise is that this behaviour may lead to some common yet destructive financial mistakes. Let me explain some of these investment mistakes and how you can learn from them:

Not Tying Your Investments To Financial Goals

The first mistake that many investors commit is of believing that their job ends after merely investing their savings in some popular investment instrument. They often do not tie their investments to specific financial goals. This can leave your investment in jeopardy.

Before linking your investments with financial goals, make sure you have identified your financial goals, which may include the purchase of a vehicle, building corpus for retirement and child’s higher education, or a family vacation abroad.

Each life goal, whether it’s short term or long, would require a separate investment. When your goals are precise, your decision to invest separately for each goal would be driven by the returns expected, investment horizon and your risk appetite.

Being Impatient With Your Investments

Erratic decision making based upon hearsay or temporary market fluctuations is a sign of impatience. When you invest for specific financial goals, especially the long-term ones, you need to be patient with your investments. However, that does not mean you turn a blind eye towards them. Remember to periodically review your investment basket, primarily for two reasons.

One, in case your financial goals undergo any change, the investments tied to them would also require rectification, if necessary. Secondly, your mutual fund portfolio must be reviewed periodically, to track your chosen funds’ performance (by comparing it with the benchmark indices and peer funds) and re-balance the portfolio if required.

In case a particular fund has been under-performing for past two to three years or its fund manager/management style has changed, consider switching to a better performing fund, to ensure your financial goals’ corpus creation remains unaffected.

Mixing Investment And Insurance

Investment and insurance are two completely different instruments which are meant to serve entirely different purposes. Every individual must understand that these two are the pillars of your financial planning and both are equally important.

Most investors misconceive insurance as an investment instrument and end up investing in money back policies or endowment plans, neither of which provides adequate returns and adequate cover.

On one hand, term insurance and health insurance are a must to secure your family’s future and medical expenses. Term insurance’s main objective is to provide a replacement income to your dependents in case of any unfortunate event. Health insurance assists you to pay heavy hospitalisation expenses and tackle medical emergencies, along with a tax benefit on premium (under section 80D of income tax act) paid for yourself, spouse, dependent children and parents.

On the other hand, investment helps you to achieve your financial goals by growing your money, over time. When you align your investments with separate life goals, as investments provide a direction to your goals and make the task of achieving such goals much simpler.

Learning From Your Mistakes - What To Do

Review Your Past Actions

Firstly, you need to take responsibility for your actions. Reviewing your past actions would assist in knowing where you went wrong. Perhaps, the basis or idea behind your investment decisions wasn’t clear enough, resulting in incorrect decision making. Upon reviewing, if you are clear enough as to which actions lead to the mistakes, make sure you learn from them and not repeat these in future.

If you aren’t very sure regarding where you went wrong, consider consulting a financial advisor to review your portfolio. The advisor would be in a better position to judge your decisions and help you know which actions lead to mistakes.

Identify The Loopholes

Reviewing your past actions can also help in identifying any loopholes, and help in clarifying the next course of action to be taken. From the above step, you must have identified the incorrect actions which led to such mistakes.

Now you need to know the reason behind those mistakes. Identifying the loopholes would prevent such erratic decision making in the future. Reasons can be many, such as basing your actions upon hearsay, blindly trusting the agents, investing without adequate knowledge, impulsive decision making etc. Once you know the source and cause of such loopholes, taking corrective measures becomes easier.

Take The Required Actions To Rectify

Once you have reviewed your actions and identified the loopholes, next step should be to make the required rectifications. The rectification process and course of actions would depend upon the type and reason behind such mistakes. To avoid them, ensure that your investment decisions are based on proper analysis, adequate market knowledge and reliable advisory portals.

While looking for rectification steps, take the help of financial advisors in case you get stuck anywhere. Being unsure and repeating your past mistakes should be avoided. If you are taking the corrective measures on your own, make sure you are confident enough regarding them.

Naveen Kukreja is CEO and co-founder of Paisabazaar.com.

First Published:Sept 19, 2018 7:30 AM IST