Financial mistakes can have a devastating impact on your financial life. In the era of digitalization and huge data flow, we often believe that we have all the information that is required to make prudent financial decisions. It could be from picking a five-star rated mutual fund scheme or buying a stock based on a tip from a friend who has no knowledge about the fundamentals of the company.
Such decisions can lead to huge monetary consequences if things don’t turn out to be as planned. Online platforms have created a narrative that everything can be self-managed. While one can manage an investment portfolio, financial planning is more of a holistic approach towards achieving goals.
In this article, we are going to discuss five brutal mistakes investors make that can create a devastating impact on their financial lives.
Heavy spending habits: In the current age of social media show-off, everyone wants to dine in a 5-star restaurant even when it is not affordable just to keep the status game going. A lot of people like to spend on gadgets and things which they really do not need. As Warren Buffet once said, “If you buy things you don’t need, very soon you will have to sell things which you actually need”.
An effective way of controlling your spending habit is to delay your decision by 72 hours. If you really need something, you will still buy it after 72 hours. Everything else will simply stay in your shopping cart as you will realise that it was not required.
Getting advice/tips from friends: This is very common these days, it could be your close friend or an office colleague or even your family member who gives you the next hot stock tip that can double your money. Getting into such things could be dangerous for your financial well-being. Sometimes you find it so convincing that you bet a huge sum of money on that and tend to lose. Ensure that you take advice from people who are qualified to advise you on money matters.
Relying on employer health insurance: This is one of the biggest issues in India right now. We think a health insurance cover of Rs. 3 lakhs is sufficient for our family that is being provided as a part of your compensation by the employer. We have had examples where the cost of surgery was upwards of Rs. 10 lakhs and the coverage amount from the employer was Rs. 3 lakhs. This ultimately led to a heavy outflow of savings which could have been avoided by taking own comprehensive health insurance.
Also, we don’t consider the situation of job-loss or layoffs where the employer insurance won’t get carried. It is always prudent to have our comprehensive health insurance policy that covers all the dependent members of the family. Health insurance premiums are still at reasonable levels in India and they provide a comprehensive cover for major diseases.
Exotic investment products: This is a new trend. Just like how we love to play the status game by buying products like or higher than our neighbours, similarly we now want exotic products about whom we can discuss at our offices or in friend circles. Investing in products like cryptos, structured products, alternate investment funds etc. have become the latest trend.
Investing in these products sounds very intelligent and can make you look a better investor than others, however, these are highly sophisticated products with a lot of complicated operational issues. Unless you have acumen to understand the risks, it is suggested to stick with basics. Things like mutual funds, fixed deposits, post office schemes are great for investors who are looking to achieve their financial goals.
Quitting a full-time job to start trading stock markets: It is very easy to get tempted by the screenshots posted on various social media handles about the single day profit made by some speculators being higher than the entire month’s salary of some people. Instead of trying to realise how difficult it is to generate those returns, we tend to fall for it and get into trading stocks to generate those returns. Founder of one of the largest discount brokers in India once tweeted that 99% of people who trade on his platform make losses.
Knowing this, people continue to trade and try to hit that jackpot where they make their entire year’s salary in a single trade. We have seen a lot of real-life stories where people have lost their entire life savings in trading. But we still tend to fall for it. Always keep in mind that trading is a specific art, it requires a lot of qualities, skills and experience. There are no shortcuts to making huge money from trading. Also, the chances of being on the losing side are 99%. It is better to build wealth on time tested strategies of long term investing.
Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited