Despite the slowdown in the Indian economy, India added 34 new billionaires to Hurun Global Rich List of 2020. As astonishing as this sounds these HNIs haven’t become wealthy overnight. Wealth creation and its preservation take considerable effort and time. In our pursuit of wealth accumulation, we are often hasty and negligent in choosing the right investment avenues that suit our needs. This careless attitude and the need for quick results or gains often tend to hamper wealth creation.
On the flip side, an extremely conservative attitude towards money matters too can considerably affect your returns setting you back by many moons. In the investment world risk and reward are inextricably entwined. No investment provides high returns without a certain level of risk involved. The right question here is to ask yourself how much risk you are willing to take, making risk assessment an absolute priority before you begin investing, a step which investors often overlook.
Let’s run through some common mistakes that investors commonly make on their journey to wealth creation:
- Winging it – The lack of preparation and planning is a major reason for pitfalls in investing. Without the presence of a plan, the objective is unclear and leads to a haphazard accumulation of assets with unpredictable outcomes and gains.
- Financial myopia – A myopic vision for wealth creation culminates from our need for instant gratification. This near-sightedness causes investors to overvalue today’s rewards with disregard to its price tomorrow resulting in the accumulation of laggards in your portfolio.
- Zero insight – Investors often follow the noise in the market or an acquaintance’s investment advice to invest in a trending asset. Their lack of insight, judgement, and research could land them with investments that do not match their goals, investment strategy, or risk appetite.
- Debt first – A clear understanding of your debts and the ability to decipher which is depriving you of possible gains is essential. Home and car loans are comparatively easier to pay off but the benefits of its pre-payment will not surpass the losses in defaulting a credit card payment which has a much higher rate of interest.
- Backup plan – Most investors fail to manage their wealth effectively especially when emergencies arrive. Businessmen often tend to avoid insurances due to high premiums, but a single catastrophe can put them out of business for life. The same goes for individuals who lack life or health insurance.
- Times of need – An emergency corpus is only for emergencies and is usually parked in easily accessible investment instruments. Unfortunately, the ease of accessibility makes it more susceptible to use for unnecessary expenditure, inevitably depleting the corpus and defeating its purpose.
- Concentrated portfolio – The lack of diversification in assets can cause the portfolio to be lopsided and open to sector risks or market risks in case of extreme volatility. Exposure to a single asset type with high correlations is a gamble. Investors must diversify their investments across asset classes, sub-asset classes, sectors, and even geographies for the best results.
Investing is serious business, you should not risk it all on a game of toss and pitch. To ensure you make your money work for you, you must tread the route of investing with caution and avoid any knee-jerk reactions to the noise around you. Better still consult an advisor you trust to handle your wealth prudently and diligently to ensure you stay the course and reach your set financial goals.