Financial planning might sound like it’s all about math, but it’s connected to how people feel, what they impulsively want, and the mistakes they make in their thinking. There’s a whole area of study called Behavioural Economics that looks at why people make money choices based on their thoughts, feelings, and culture. Even though no investment plan can promise complete safety, understanding these common thinking mistakes can help you take fewer risks. In this article, we’ll discuss some of the common mistakes and how you can fix them to make smarter choices with your money.
Not Starting Early: A Missed Opportunity
When you want to invest your money, starting early is helpful. It doesn’t matter if you’ve just started working or have many money responsibilities. Even if you save a little bit of money regularly, it can grow into a lot over time, thanks to something called compounding interest. The sooner you start saving and converting them into investments, the more money you’ll have in the long run, and you’ll get to enjoy more benefits from it.
Not Having a Goal: The Importance of Clarity
Even though every mutual fund has an objective mentioned in its documents, why don’t we set a clear goal when investing our hard-earned money? Setting clear financial goals is essential. Are you saving for retirement, your child’s education, or short-term expenses like travel plans? Your investment horizon and risk tolerance should align with your objectives.
Diversify your investments in different ways depending on what you want to do with your money. If you’re saving for far-away things like retirement, it’s a good idea to put your money in things like stocks that can grow a lot over time. But if you need your money soon, like for a vacation or urgent expenses, it’s better to choose safer options that don’t change in value too much.
Not Choosing the Right Portfolio: Balancing Risk and Reward
Have you ever wanted to eat your favourite burger, but unfortunately, the shop where you usually buy it from was closed? So, you went to another shop to buy the same burger, brought it home, and when you took a bite, you experienced a disgusting taste like never before. You thought you should have waited for your favourite burger shop to open. In the same way, it is important to take time properly and choose the right investment option.
Mutual funds offer diverse portfolio options. Your choice should reflect your financial goals and risk appetite. High risk-takers may opt for equity-heavy portfolios, while those seeking stability may Favor debt-based investments. A hybrid portfolio, balancing equity, and debt can be ideal for mid-to-long-term objectives.
Regularly monitor your mutual fund’s performance and be ready to adjust your strategy if needed. You can switch to a different fund type, modify your asset allocation, or explore various asset classes to maintain a balanced and profitable portfolio.
Recency Bias: The Pitfall of Short-Term Thinking
Retail investors are often attracted to the latest trends or news in the market and often fall into traps because of this. Avoid making long-term investment decisions based solely on recent market trends or headlines. This can lead to the common mistake of buying high and selling low. Remember that markets tend to stabilize over the long term. Impulsive decisions during market fluctuations can undermine your financial goals. Moreover, always remember your objective for investment.
Trend-Chasing: The Danger of Herd Mentality
Following the crowd or investing in the latest trends without thorough research is a risky strategy. Just because a particular stock, cryptocurrency, or mutual fund has recently performed well doesn’t guarantee future success. Assess your goals and risk tolerance before jumping onto any investment option.
Loss Aversion: Embracing Change
People often fear losses more than they value equivalent gains. This can lead to holding onto underperforming assets for too long, hoping for a turnaround. Instead, consider cutting losses and reallocating your investments to more promising opportunities. Don’t let fear of loss hold you back.
Financial planning is not just about numbers; it’s also about managing human psychology. Behavioural biases can influence investment decisions, often to our disadvantage. By recognizing these biases and consciously working to overcome them, you can make more informed and rational financial choices. In the end, mastering your emotions is the key to achieving your long-term financial goals.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.