Mistakes are a part of investments; even the most seasoned and well-known investors have made mistakes during the course of their investment journey. As investment sage Warren Buffet puts it, “If you don’t make mistakes, you can’t make decisions.”
However, it’s essential to learn from past mistakes and make sure not to repeat them in the future. Young professionals, who have just started their careers, are more prone to making investment mistakes as the new-found financial freedom invariably results in hasty decision-making. Given below are 5 mistakes that young professionals must avoid:
Follow the herd mentality
Young professionals who aren’t aware of the nitty-gritty of investment often follow the herd mentality. This refers to investing in products and instruments chosen by the majority. Herd mentality can lead to investments in products and instruments that don’t align with one’s financial goals.
Therefore, for young professionals, it’s essential to understand whether the product they seek to invest in aligns with their goals, investment horizon and most importantly, risk appetite.
Not testing the waters before committing
Any investment must be done after testing the waters. For instance, there are some asset classes such as bitcoins that promise to offer extraordinary returns. However, such investments aren’t recognized by the government of many countries.
Therefore, it’s important to test the waters before committing and not jump into an investment. Understand the core fundamentals of the asset class, know how they generate returns and if they can withstand the test of times.
Making an impulsive investment decision can prove costly. For instance, during short-term market fluctuations, the value of equity investment might decrease. In such a scenario, most young professionals tend to panic and exit the market.
Also, there are occasions when they tend to invest in an asset class based on its short-term returns. Such impulsive decisions must be avoided at all costs and a moment of impulse now can prove dearer later. Stay invested for a longer duration to tide over market volatility.
Not diversifying enough
Diversification is one of the core tenets of investing. It ensures that risks are evenly distributed across the portfolio. Diversification hedges against both systematic and unsystematic risks that exist in the system.
Often, young professionals are aggressive and tend to invest solely in equities. However, equities are inherently risky and if a portfolio comprises only of equities, during major market swings, it can take a major hit.
Therefore, diversifying an all-equity portfolio with debt instruments is crucial in balancing out the risk associated with investing solely in equities.
Embarking on investments on amateur advice
Investment is an art that requires a deft understanding of the various available instruments. Most young professionals tend to embark on their investment journey on suggestions received from family members and friends. While there’s nothing wrong with it fundamentally, there’s no substitute for professional guidance.
Professionals help you choose the right instrument as per your financial goals, risk appetite and investment horizon and make sure you make sound investment choices.
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