Right from the first column I began with, my aim was to inform, educate, and make my readers realise that investing ones money is not rocket science, in fact if one is prepared to shed the fear and ignorance you can just as well plan your own finances without any guidance from third party who may come, with or without vested interests. However, one needs to be mindful not to get carried away by the myths that are associated with investments generically. Todays column is a list of myths which should be avoided by my readers while investing.
I am too young to plan for retirement: This one is especially for my young readers. Have you started planning for your retirement? You may be saying ‘who me? I am too young to be thinking about retirement”. It is not so! Rethink. You should have started thinking about it yesterday. Because time flies quickly.If you are smart, and plan for retirement when you are young, your retirement years will be those “Golden years”. If not, you need to compromise, and you need to work longer and retire later than others.
East or west FDs are safe and best: There is nothing wrong in investing in FDs. FDs are safe, and it gives us fixed return. But there is no meaning in investing all your money in FD. The post-tax return of an FD will hardly beat inflation. If your investments are not beating inflation, then your money is losing its purchasing power. FDs are safe but not always the best option.
I can never be as good as Warren Buffet or Rakesh Jhunjhunwala so why try?: In the words of Warren Buffet “Success in investing doesn’t correlate with IQ once you’re above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” You don’t need a super brain for making investment decisions. You only need common sense and discipline. If you don’t have enough time and expertise, then you can get assistance from professional financial planners.
Stock markets can earn me quick bucks: This is a common myth among investors. Stock market will reward the long-term investors. Stock market is a system which transfers money from investors who are fearful and greedy to the investors who are balanced and rational.You need to be calm, patient, disciplined, and rational. You don’t have to be smarter than the rest; you must be more disciplined than the rest.
Timing the market is important: Investors often spend a lot of their time in trying to identify when the market is very low or high, and timing the purchase and sale of investments accordingly.In other words, they want to time their exit when the market has reached its top and to time their entry when the market has reached a bottom. This not a practical idea because there are so many influencing factors to the stock market. Predicting all the factors and making investments is practically not possible. Instead of that stagger your investments through SIP, STP and stay invested for long term.
There is no such thing as too much diversification: Diversification is needed. A well-diversified portfolio can be created with 10 stocks or 3 mutual funds. Having more than 20 stocks or 6 mutual funds can dilute your returns. The reason is you are not only investing in best stocks and funds, you are investing in above average and average stocks and funds. So, your returns will come down. Instead of over diversification, you need to concentrate on a few stocks. It is possible to achieve the required diversification with a few stocks or funds.
The best way to make money is investing in what is hot: If you are investing in what is hot, then you are following the crowd. If you follow the crowd, you will get what others are getting. You will not get anything more. You need to be fearful when others are greedy, and you need to be greedy when others are fearful. So, don’t go by the market trend or the hot pick of the month. Think like a contrarian and follow value investing.
As I sum up todays column one thing is clear that your returns from investment are not derived from the myths and superstitions you follow at the time of investing. Myths are nothing but widely held false beliefs or ideas which lead to wrong decisions and hence should not be followed. In the words of Robert Anton Wilson an American novelist, Humans live through their myths only to endure their harsh realities in the end.
