Our Instincts play a big role in our investment decisions. Often, these instincts are based on our perceptions rather than on information available to us. Today, we have far greater access to information through print, television and internet media, yet our minds are trapped in age old investment myths.
When we follow our myths while investing our money, we tend to make incorrect and inadequate investments. Here is a list of 5 investment myths that we should avoid.
Investment Myth 1 : Plan for retirement? Ah, I can do that later!
In early stages of our career, retirement planning is no where on our radar. We try to channel our earnings to acquire latest gadgets, buy a fancy car, go on exotic vacations, etc. Saving for our retirement is some thing that we put on low priority. While acquiring lifestyle items are important, it is also important for us to take necessary actions to preserve our lifestyle post retirement.
It’s never too early to plan for retirement. On the contrary, the earlier you begin, the easier the task will be. When you start early, the amount of investment required to build a substantial retirement kitty is smaller than the amount required to make the same kitty if you delay retirement planning. Our earlier article, Retirement Planning – Start now, Save more, Retire rich, explains why starting early with your retirement planning is advantageous for you.
Investment Myth 2 : Stock Markets are rising, lets make quick bucks!
Stocks as an asset class are expected to out perform all other asset class over a long term. The high returns associated with Stocks also come with higher risks. When markets turn, instead of making quick bucks, you can end up loosing your investment. Understanding your risk tolerance is very important.
It is advisable to invest as per your risk profile and identify the best investment that suits your needs. Your portfolio might need adjustments based on changing market conditions. But at all times, the investments should reflect your risk profile and asset allocation based on the objectives that you have set out to achieve.
Investment Myth 3 : Why diversify? Equity is all I need
As explained earlier, equity investments are good in the long term, however, this does not mean that you put all your eggs in equity basket. As the manager of your portfolio, you too need to understand the importance of diversification. There will be periods when some of your holdings will lose money. When that occurs, you need other investments to offset the decline. It is pertinent that you hold a portfolio comprising of various asset classes like fixed income instruments, gold and real estate.
By diversifying your portfolio, you’ll give yourself an opportunity to grow your money despite the ups and downs that comes with investing.
Investment Myth 4 : Investing is a one-time activity
Assume that you have made investments in various avenues and asset classes that are right for you. Is it sufficient? Investing is just one aspect of your overall financial strategy. Our financial plans requires review and re-adjustments as we move forward putting our plan in action. Our needs may change, we may fulfill some of our requirements, some new requirements may emerge. So, we should always review our plan frequently and incorporate changes in it as our needs and requirements change.
The complete financial planning process is explained in one of our very first post on personal money : What does personal financial planning mean?.
Investment Myth 5 : Saving tax is the only objective for me to Invest
Large section of our society currently invests only in tax saving instruments. Once their investment limits in these instruments are exhausted, they don’t feel the need to make additional investments.
While tax saving investments are important and you should utilize your investment limits to take optimum advantage of saving your income tax. However, you should not limit yourself to just tax saving investments.
Our charm for tax saving investments was fueled by Government as they needed to tap the retail savings to fund their developmental programs. To achieve a greater asset mobilization special incentives were built into these tax saving investments in form of tax exemptions, assured returns, guaranteed benefits and special bonuses. This made investment in such schemes extremely popular. Often, returns offered by these investments are marginally above inflation.(inflation is a situation wherein the value of money declines over time).
This means that sticking to just tax saving instruments may not help you fulfill your financial objectives. You need to beat inflation by making investments in avenues that grow faster than the inflation rate, like equities for instance. This will not only ensure that the value of your money is preserved, but it can grow significantly enough for you to achieve your financial goals.