New investors find perfect formula to lose money ..
The stock market flirting with new highs and talks of an impending correction in the market are making some investors nervous, especially the latecomers to the party. Some of these investors have already stopped their Systematic Investment Plans (SIPs) in various equity mutual funds. Now, they are asking around whether they should sell their entire investments. According to several investment advisors, this is a perfect formula for a disaster
Here is a typical example that would give you a glimpse of the profile of these investors: Mr X has been investing in various equity mutual funds since 2016. He already stopped his SIPs in these schemes, he says. Now, he would like to sell his investments. The reason behind the decision: the schemes have not been doing well for a while now, and he doesn’t believe they are going to do well soon. He might come back to the market after a big correction
In fact, he is the clichéd image many financial advisors used to employ to characterise regular mutual fund investors a decade ago. The picture of a simpleton who gets into the market at the wrong time and get out of it at the wrong time, blaming the whole world for his misfortune and lost money. However, the resilience showed by average investors during the financial meltdown in 2008 and its aftermath have helped to erase the memory of the clichéd simpleton. It seems, the cliché is re-entering the scene.
Look at the series of mistakes these investors have made already. One, they got into the market when the market was nearing its all-time high. Two, without seeking the guidance of any advisor, they decided to invest in equity mutual funds, picked up some five and four-star schemes and started investing. Three, as soon as they saw their investments are not performing as expected, they stopped further investments. Finally, there is a talk of correction all around, and they are planning to sell their investments. Oh yes, with the promise of returning if the market correction meets their expectations.
Why this is a perfect formula to lose money?
One, you should never start investing only because an asset class is doing great.
Two, if you are not familiar with concepts of investing, you should always hire the service of an expert.
Three, picking up great schemes or highly-rated schemes doesn’t guarantee success; it should match your risk profile and investment objective
Four, you should invest in equity schemes only if you have an investment horizon of five to seven years; you should also be mentally prepared for volatility and losing money temporarily.
Five, never stop your investment when the market gets into a bad phase; it helps you to earn more units and maximise your profits over a long period.
Six, getting in and out of the market based on predictions will not make you rich; if anything, you will lose money.
Seven, you simply cannot predict the market. You might get it right once, but it is almost impossible to predict the market consistently
Finally, the secret to long-term wealth creation is simple: invest regularly, albeit a small amount, over a long period.