scorecardresearch5 common financial mistakes investors must avoid in 2023

5 common financial mistakes investors must avoid in 2023

Updated: 21 Jan 2023, 09:48 AM IST

It is common to make mistakes as commonly we decide on our investments. However, some mistakes can put you in a complete “break or brake” situation, thus, resulting in unforeseen losses.

What are the common mistakes that investors must avoid in 2023?

What are the common mistakes that investors must avoid in 2023?

Scroll through some famous social media handles and you will find many of them discussing how 2023 will usher in new possibilities of artificial intelligence (AI), machine learning, IoT, electric vehicles and replacing conventional fuel with green hydrogen being a new reality. 

However, investors fear that the stock market in 2023 will mirror the volatility in 2022. The stock market stayed mostly in red at the beginning of the year, thus, posing more difficult questions than answers. The year started with so many companies booking losses in their quarterly results, employees being fired, technology stocks losing steam and stock markets tumbling down faster than anticipated. 

This has left many investors exasperated as they frustratedly inquire about the companies’ next step to increase their sales and ring in profits. While 2022 was not a year of miracles for sure, investors are not too optimistic about the stock market’s performance in 2023 too.

Considering how 2023 would be synonymous with volatility, it makes sense to list possible mistakes that investors make while deciding where and how to park their earnings. Some possible mistakes could be

Messing up with emergency funds 

It’s good to invest and stay invested but too much greed and hurry in a bid to become rich in a short span of time can cause many investors to use the money set aside in their emergency funds for investments. Irrespective of how fructuous the market may seem, it makes no sense to use emergency funds to invest in equities. However, the continuous sea of red in 2023 may prompt people to ignore the importance of having an emergency fund and invest the money into the stock market. 

Not giving enough space to bonds 

Look at your investment portfolio and check how much of your money has been allocated to bonds and debt. It is not surprising how most of the investors you may know may be constantly pumping their money into equities. To date, debt funds have not yielded much causing many people to ignore them or exit them altogether. 

However, with rising interest rates, especially in bank deposits and a rise in returns from bonds, it makes more sense to put some money in them this year. Investing in bonds and government securities (G-Secs) is a complicated process, and that is why you may park your money in debt funds that are comparatively less volatile than equities. 

With the markets going deep red and investors not losing their optimism over the resilience of India’s economy, many people are rushing in to put more money into equities. Though this may pay off in the long run, extreme greed can cause many investors to be susceptible to extreme market downturns. Traders may also lose their money as foreign institutional investors (FIIs) continue to sell their stocks for more cash in hand. 

Mistaking “diversity” for “diversification”

Buying different stocks of different companies from different sectors is just diversity but this does not amount to diversification in your investment portfolio. Investors would still be stuck to equity investing in this case, thus, continuing to make them vulnerable to movement in the stock market. Instead of diversifying between various investment opportunities including equities, debt, gold, real estate and more, many investors are prone to making the mistake of investing in only kind of stocks or investment options alone.

Not churning your assets frequently

How much time do investors spend on assessing and reassessing their investment portfolios? Ignoring asset allocation is the biggest blunder that many of them resort to, thus, highlighting why many of them find it difficult to titillate between debt and equities to avail of the benefits of both kinds of instruments. 

Asset allocation will be at the core of investing in 2023. Deciding on the right assets for investments and not the right kinds of stocks will decide how well you fare this year. Sticking to the right set of investments will drive your alpha than relying on your old stock selection process and churning them over and over again.

Remember that you have put in far too many hours to build your portfolio. Do not let one small mistake squander away all your life’s earnings in one go. You must have invested in a variety of assets, and it is critical to regularly monitor market conditions and review investments. Because these are in line with your financial goals, reviewing your investments can assist you in regaining balance over time.

Withholding your investments

The constant market volatility can send even the bravest of investors scuttling for cover. Sudden and prolonged red phases in the market spell pessimism and doom, thus, resulting in many investors either withdrawing their investments from the market. Suddenly stopping systematic investment plans (SIPs) out of fear or waiting for the market to bottom out before investing is a common mistake that many investors make while deciding when, how and where to park their earnings. 

Investing requires knowledge, not emotion. Decisions are influenced by a variety of factors, and emotions play a significant role in the outcome of these decisions. When making decisions, we use emotional filters to understand the situation and predict the outcome. This behaviour has the potential to devastate our financial situation. Unbiased of which way the market goes, make sure to stay invested. 

In many cases, investors fail to decide on their investments based on opportunities and a well-defined strategy. They fail to make use of technical and fundamental analysis or carry out the necessary research on certain kinds of stocks or assets, thus, resulting in wrong stock selection or a misconstrued choice of assets.

These are investments one can make to beat inflation.
First Published: 21 Jan 2023, 09:48 AM IST