Investment mistakes can be avoided by embracing your Investment Plan

We invest some part of our hard-earned money with the objective to grow our money over time and help us achieve our financial goals – be it buying a house, owning a car, making provision for retirement, provision for children’s future,  going on our dream vacation, etc. In our practice, we have come across people who have been following a conflicting approach in investing i.e. doing random investments, looking at insurance as investment products and then utilizing them unsystematically towards approaching financial needs as and when required. If Investment Plan is designed on the basis of the Financial Plan, one can rationally steer clear of major investment mistakes in life. 

Financial Plan is the starting point of the journey towards financial well-being. As Certified Financial Planner in Kolkata, during financial planning, we draw the financial road with the intention to not only fend off making future investment mistakes but also frame corrective actions to get over the existing situation due to past investment mistakes.

Draw your financial road map to avoid investment mistakes

Practical ways to avoid investment mistakes through investment planning are as follows:

Know your risk profile: You must know your capability to take risks while investing. Also, you need to learn how much risk you are willing to take while investing. These depend on your preferences, past experiences, values and attitudes. As Arijit Sen is a SEBI Registered Investment Advisor in Kolkata, we give supreme importance to risk profiling of our clients. Risk tolerance is a psychological characteristic which is best determined by way of a psychometric test. We conduct sessions with our clients and take through through the crux of Risk Profile Report to create financial awareness.

Invest only after setting financial goals: You need to have a purpose for investing. Your purpose refers to your financial goals.  Once you set your specific financial goals in life, it gives logic and direction to the various financial decisions you need to take to achieve the specific financial goals. With time, your financial goals may also change in terms of timeline to achieve the goal and goal amount. Therefore, your investment portfolio must be re-aligned accordingly.

Never search for the “best” investment: Almost every investor wishes to abandon their investment product that has under performed in the last one or two years and jump on to the top performing investment products. Countless investors have lost money by assuming today’s hot sector would power their investment portfolio forever. Historically, it is seen that “hot” investments don’t usually stay hot for long and investments that aren’t doing well now may make a comeback. 

Act of omission: While developing product suitability matrix based on your specific financial goals, time horizons of investments, your own risk profile, personal and macroeconomic factors, special emphasis must be given to identify where not to invest. Complicating the investment portfolio by including various investment products can become cumbersome and difficult to keep track. Ultimately, it’s about protecting yourself from experimenting with your hard-earned money. 

Do not invest based on past performance: Investors often expect the same rate of return that an investment has delivered in the past. Basing your investment decisions on past performance may badly backfire and wreck your progress towards your financial goals. Investing based only on past performance is similar to driving a car by focusing only on the looking glass – accidents are bound to happen.

Considering taxes and inflation: We all work hard for money to meet your present and future needs. Taxes and inflation are silent killers. Let’s consider that you fall in the 30% tax bracket category and general inflation is 6% per year.  If you have invested in an investment product which may generate 9% per year, what will be your tax & inflation adjusted return? It’s only 0.28%. You need all the required investment vehicles in your baskets with proper asset allocation which can offset inflation and judiciously manage your tax implications.

Biases: Investors aren’t immune to biases, be it cognitive or emotional. Identifying and understanding the detrimental cognitive and emotional biases can help an investor to take rational decisions related to investments. Having a purpose of investing always helps one to go the distance.

Understanding investment asset allocation: Investment asset allocation is like a rudder to balance one’s risk and investment portfolio return. Investing in too many stocks or several mutual fund schemes from the same category does not completely reduce the risk. The correct asset allocation is what keeps you diversified in the market, rather than heavily invested in one asset class, which, if falls down or goes up, takes your whole portfolio with it. As Financial Advisor in Kolkata, we do not follow thumb rules while designing asset allocation. Our personal suggestion is not to follow any thumb rules because you have specific goals, investment time horizons are different and risk profile is different. We are stressing on your goals because your investment asset allocation hinges on each of your goals.

Becoming aware of risks associated in investments: Investments are unlike gambling. It is of paramount importance to understand investment risks involved in any investment vehicle before investing. As Investment Advisor in Kolkata, we draw the product suitability matrix for our individual and family clients after considering both personal aspects of the investor and the macroeconomic factors.

Researching before investing: Necessary research should be done before investing. The objective of research is to understand which of the investment vehicles suit your specific needs and whether it matches your risk profile and investment time horizon. People need to realize that Google is a search engine and not a research engine.

Reviewing investment performance at pre-defined intervals: Investments should be in line with your financial goals. Given the fact that we need to review investment portfolio at pre-defined intervals, it does not mean that it should be too frequent. The purpose of review is to ensure that investment strategies adopted are relevant for the particular financial goal. Corrective actions are primarily taken in the following cases:

• Any change in goal – amount required may change, timeline of goal may change.
• Your risk profile has changes.
• Any change in your personal factors.
• Any change in macroeconomic factors.

Taking professional help of a qualified Financial Advisor: In case, you do not have time to look after your personal finance or you do not have adequate knowledge on the subject, you can hire a professionally qualified Financial Advisor for unbiased guidance. A Financial Planner accompanies you as you accomplish your life’s goals. Generally, your Financial Advisor should be a practicing Certified Financial Planner/ Chartered Financial Analyst and a SEBI Registered Investment Advisor who is expected to put client’s interest first in providing financial planning and investment advisory services.

Financial planning exercises play a pivotal role in making you visualize and set your financial goals in life. It is advisable to develop investment strategy based on your specific financial goal, time horizon of investment, your own risk profile, personal and macroeconomic factors. As Fee Only Financial Planner in Kolkata, we believe that through Financial Plan review process, you can avoid investment mistakes, alter and rectify your action plans and stay the course.