The Seven Deadly Sins of Investing
"In the long run, it's not just how much money you make that will determine your future prosperity. It's how much of that money you put to work by saving it and investing it." – Peter Lynch, American businessman and stock investor, who managed the world's largest and most successful mutual fund for Fidelity Investments between 1977 and 1990.
Making financial decisions can be tough, especially when these decisions are going to have such a tremendous impact on your future. Most advisors talk about the risks of a particular investment product. But they never explain how human behaviour and natural instincts guide so many of your investment decisions and what you must do to avoid the common mistakes that can put you in trouble.
Every so often you will get enticed by the hottest new trend or get swayed by false promises of unrealistic profits while overlooking important details like how much fees are being charged. You might get tempted to blindly follow the crowds or take advice from 'experts' without questioning their intent. Here are the seven deadly sins repeatedly committed by investors that you should avoid at all costs.
1. Greed: Pursuing unrealistic returns
The desire to want more is hard-wired into our brains and it requires a conscious effort to keep it under control. Greed is one of the biggest reasons for the downfall of many investors. The next time someone suggests buying a stock which will triple your money in 6 months, or when a financial advisor tries to sell you a product that guarantees 70-80% returns in 1 year, ask yourself – Am I letting my greed to drive my decision to invest? If the answer is yes, then stay away!
2. Lust: Chasing the latest fad
We live in a digital age where we are constantly getting bombarded with all kinds of information on the latest and hottest trends. A financial product or a particular mutual fund performs exceptionally well for a year and everyone starts touting its unbeatable fundamentals. Falling in love with ideas that are being talked about all the time is natural. But making investment decisions based on short-term trends and recent performance data can lead to some very bad choices.
3. Sloth: Overlooking the details
There is a famous saying, “The devil is in the details”. This is probably one of the most important truths about most financial documents. Investors often make the common mistake of overlooking the details of any investment product and basing their decision to invest on a few broad features. This problem is compounded by financial advisors trying to misguide investors to buy products that earn them higher commissions, even when these are unsuitable.
4. Gluttony: Postponing your savings
We live in a world where our need for instant gratification gets constantly fuelled by modern technologies and a slew of information. One of the biggest challenges in investing is to maintain a disciplined habit of saving money from every pay check and regularly allocating funds to your investment account.
5. Envy: Following the herd
Peer pressure and envy can play havoc on your investment portfolio. If you find yourself investing in something simply because someone else has made some quick bucks from it in the past, that can lead to a big mistake. Ignoring the questions of how particular investment can provide good returns and why it is suitable for your requirements is a recipe for disaster.
6. Pride: Ignoring negative signals
"More the knowledge, lesser the ego. Lesser the knowledge, more the ego." – Albert Einstein
Pride can be a terrible guide when it comes to investment-making decisions. It can force you to ignore what the markets are telling you about your assets. It can also give you a false overconfidence about what you know. When making crucial financial decisions, you must always make room for unforeseeable market dynamics that you might not have taken into account in the past.
7. Wrath: Overreacting on downturns
"Lord, grant me the strength to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference."
The world of investing is wrought with ups and downs, highs and lows. The global economies have become increasingly intertwined and keeping track of all the factors that impact our investments is nearly impossible. This leads to unpredictable swings in the short term. If you don't understand the fundamental reasons of why you have invested in a product, you will react angrily when things don't go as expected. You must avoid impulsive decisions and analyse all the available information and take calm, calculated decisions.