Bad investment decisions often lead to bad investments. Investing without proper knowledge is one of the mains reasons for bad investments. For example, investing in equities for the short term, or debt products for the long run are some of the main mistakes that people make. Due to the losses suffered from bad investment decisions, investors often lose trust in the markets. They end up investing in real estate or gold, which are more comfortable for them as they are a tangible physical asset. It often leads to them missing out on excellent investment opportunities. Here are a few tips to avoid bad investments.
1. Don’t invest just based on recent past performance
Past performance can only be an indicator when investing in stocks and mutual funds. But the investment decision cannot be solely made just based on this. People tend to invest in companies that gave a 20-25% return in the last year in the hope that they can earn at least half of it. Past performance doesn’t guarantee future returns. Making an investment decision based on it should be avoided.
2. Don’t Speculate
Investing without knowledge about the investment product is speculating. The probability of losses in speculation is higher than the likelihood of profits. People often burn their hands in trading and decide that markets are not the place for them and end up never in investing in shares or mutual funds. By doing this, they end up losing out on excellent market opportunities. Hence, avoiding speculation is better.
The famous saying “Don’t put all the eggs in one basket” is used for investing from a long time now, and it never loses its worth. Diversification is the key to reducing risk in investing. Investments become vulnerable when all money is put in one company. The risk of losing it is more. Every business faces a threat, but when investments are spread out, the chances of losing money is less. Diversify across asset classes sectors and spread out the risk.
4. Follow the routine of investor operational framework
The CEO of value research, Mr. Dhirendra Kumar, said that an investor has to follow an operational framework. It should be his/her routine. The framework includes being a regular investor, reviewing the investments regularly, and being a thoughtful investor. An investor should be following this framework, and if he/she is unable to, then it’s better to invest in mutual funds, and all these are taken care off.
To avoid bad investments, an investor should assess every investment based on four parameters. Risk, return, liquidity, and tax benefits. If there is no concrete answer to these questions, then the investor should refrain from investing in that product. Investing isn’t wrong, but our decisions can make it bad.
Be careful! Happy investing!