Three Deadly Investing Sins

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Three Deadly Investing Sins
3_Investing_Sins

A Wikipedia page on Indian demographics enlightens us that India has more than 50% of its population below the age of 25 and more than 65% below the age of 35. It is expected that, in 2020, the average age of an Indian will be 29 years.

These statistics are truly exciting. However, the most vital responsibility of the financial services industry would be to help ‘Young India’ become financially independent in independent India!

It has been noticed in the past that investors have been prey to wrong actions, faulty biases and delusional beliefs which derail their financial lives. An interesting angle is that many of these have their roots in financial ‘innumeracy’.

We would like to suggest 3 vital sins that the financial community should save the new investors from. We would also like to share the simple but often overlooked ideas that can help them from not committing them.

1). Procrastination or (worse) lack of action

Many youngsters living in the ‘present’ can’t envision the ‘future’. In the hustle-bustle of life, financial planning takes a backseat. This results in many either remaining confused, procrastinate or worst case let their money rot in ‘traditional ways of investing’. All this simply leads to one thing…lost money and lost time.

Solution: Constantly bombard young investors with financial planning calculations and the cost of delay calculation. Many young investors have stated that they have no awareness about the ‘time value of money’ (e.g: many can’t intuitively understand the impact of inflation). An interactive calculator to play around with (by end investors) would be helpful.

2). No long term orientation

Many young people, even if ready to invest, are extremely critical of their investments when they start off. The attitude is that they are giving their investments some time to prove themselves by building wealth for them! Short-term volatility of the markets either instils fear in them or used as an excuse to not pursue investment goals. They don’t remain committed to long term horizons in investing. Little do they understand, it’s not the financial market’s loss…it’s their loss!

Solution:  Long term market return charts which show the min, max, average returns alongwith the fluctuations (volatility) across various time periods. Though data keeps fluctuating, data sets show how over a period of time, the gap with minimum and maximum return reduces and thus the volatility of returns. The average long term return bands can be a reality if one thinks long term!

3). Extreme attitude towards risk

Many young investors operate on an extreme spectrum when it comes to their attitude towards risks. Some people are paranoid of capital loss, even if notional & as a result don’t venture into equity investing. Their idea seems to be that the best way to eliminate risk of equity investing is by not investing into equities! On the other hand, some people have a ‘cowboy-like attitude’ who not only invest all their assets in equities but even dabble into aggressive activities like trading, derivatives etc. without the right experience and training.

Solution: The ‘boring’ concept of Asset Allocation has to be transmitted & reiterated to young investors. There is a need to transmit concepts of stability vs growth, short term needs vs long term needs & capital preservation vs capital growth to name a few.

As they say…Do good…and before that…do no bad!

Disclaimer:

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

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