scorecardresearchWhat are the investing mistakes retail investors make and how to avoid

What are the investing mistakes retail investors make and how to avoid them?

Updated: 24 Apr 2023, 10:44 AM IST

Retail investors should focus on aligning their investments with clearly defined financial goals, understand risk and reward, avoid portfolio churn, and seek the help of a financial advisor or platform to make informed decisions.

By investing in equity shares, one gets partial ownership in the firm and these owners of the shares are called shareholders. 

By investing in equity shares, one gets partial ownership in the firm and these owners of the shares are called shareholders. 

A joke about investing in the stock markets goes like this… I figured out how to make a million dollars on the stock market. Invest two million (dollars). While the joke is certainly apocryphal, the underlying sentiment isn’t, especially for the small investor.

However, experts share their advice on how investors with just a little bit of self – knowledge and discipline can navigate the equity shoals safely.

“There is a phenomenon called the 'behaviour gap' in investing, and it tends to come about because equity returns are nonlinear - and hence investors consistently and predictably keep falling prey to their emotions while investing,” says Aniruddha Bose, Chief Business Officer, FinEdge. Bose was speaking about why investors may not benefit from good returns on the stock markets.

Some examples of human foibles that prevent you from earning good returns on the bourses include, trying to time the market by buying low and selling high, fence sitting, stopping their SIP’s during market crashes, etc.

As a result of these emotions caused hiccups, investors rarely end up earning the actual published returns from the stocks or mutual funds they buy into, which is unfortunate but avoidable.

Bose has a few suggestions for the retail investor to benefit from the bourses.

First, align your equity investments to clearly defined financial goals. This alone will broaden your investing outlook and help you to not worry too much about short term market fluctuations and more on the big picture. This will automatically eliminate a lot of the behavioural pitfalls.

Next, acquire a thorough understanding of the interplay of risk and reward. You must know what to expect while investing in equities, as good returns come at the cost of significant volatility. It’s going to be a bumpy but rewarding ride, and in order to benefit, you have to be prepared to see your capital in the red for extended phases without jumping the gun and succumbing to the action bias. Investing with awareness of what lies ahead is absolutely critical!

Finally, do not look at your portfolio too often or in other words avoid portfolio churn.

Now, equities are one of the best investment avenues that will give a decent return over sustained periods of time.

But the key takeaway is timeframe or staying invested.

“Over sufficiently long periods of time, an investor will more likely gain than bear losses without the worries of daily fluctuations,” says Shrikanth Subramanian, CEO – Kotak Cherry.

Though there will be short term bouts of volatility where the equities may even give negative returns. “It depends on the time horizon in which the investor is willing to stay invested,” Subramanian added.

Research is an option. But here too experts advice to first have self-discipline before taking your research forward.

“We have a slightly counterintuitive viewpoint on this topic because we believe that a little bit of knowledge is truly a dangerous thing when it comes to equities!,” says Bose.

As an example, experts cite how many investors select mutual funds or stocks based on 1 or 3 year returns, try to time their entries or exits based on predictions by market pundits, or buy NFOs because they believe that a low NAV is somehow cheaper.

While some amount of awareness of what is going on around you is important, actively researching stocks or mutual funds may not be a good idea. After all, most of the decision variables you will be using will be retrospective indicators. “You may also end up trying to play the news or market events to generate alpha in your portfolio - an extremely detrimental and futile move,” says Bose.

“This is not going to be a one size fits all market. You have to cherry pick the stocks that you can invest in,” advices Subramanian.

This means going through financial data to get a better understanding of what the company does, how sound the financials are, how leveraged the company is, see track record of the management, how the company has done vs its peers in the industry, various key ratios (Price/Earning, Price/Book, etc.).

However, this may prove to be problematic for the small investor.

“Generally speaking, small investors don’t have the skills to do serious research in equity. They usually invest in low-grade small-caps and lose money. They should avoid investing in cheap low-grade stocks and shun investing based on tips,” says Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Subramanian suggests a smarter, easier option would be to look at equity mutual funds, and within them use services of a financial advisor or platform that does a large part of the work for them.

But, perhaps at the end it is your inner self that will guide you.

“When it comes to equities, 'why' you invest matters as much or more than where you invest,” says Bose.

Investing based on a well thought out financial plan, sticking with SIPs in high quality mutual funds and reviewing your goals and portfolio once a year with a competent advisor is much more important than conducting your own independent market research. “Staying glued to market news will not make you a better investor, but it could certainly make you a worse one!,” Bose ends.

Manik Kumar Malakar is a personal finance writer.


Common mistakes early investors should avoid.
First Published: 24 Apr 2023, 10:44 AM IST