Three Investing Habits You Need To Ditch - Today
One of Warren Buffett's most celebrated aphorisms on investing is that "investing is simple, but not easy". With Financial Markets being collectively notorious for having short-term memories, the same mistakes often get repeated again and again - and ironically, by the same individuals. In a sense, good investing can be compared to losing weight - all you need to do to shed the kilos is to "eat less, and exercise more". While this may sound simple enough, the "ease" of achieving a weight-loss goal is a different matter altogether, as many of us will vouch for!
Here are three common habits that you must resolve to ditch today, if you aim to create wealth from your investments.
Investing after an asset has gone up in price
Common sense dictates that we should "buy low, and sell high". What ends up happening more often than not is the exact reverse. When asset prices are depressed, investors tend to shy away from it for the fear of it depreciating further, and when they rise, the same investors become frenzied buyers. Countless historical examples corroborate this fact. Recall how throngs of retail investors bought into real estate projects in glut-ridden areas in 2011-12, after prices had trebled in some location. More recently, the burgeoning interest in Bitcoin investments from the retail investing community shows that nothing much has changed. Here's a tip: if you want to build an allocation into an asset class that has already risen in price dramatically, make bite sized investments over a 2-3 period, instead of a lump sum. Unfortunately, some asset classes (such as real estate) do not allow this.
Not bothering to understand fundamentals
"Who cares what'd driving it, as long as it's going up?" is the investing modus operandi for most. Most investors couldn't be bothered less about what's fuelling a rally. However, this can be a fatal investing mistake. Deploying money into any asset without understanding its fundamentals is really tantamount to speculation. Ace investors take out time to carefully understand the drivers behind the growth of an asset class. For stocks, it could be expected earnings growth. For realty, the demand/ supply balance and location. For long term bonds, the medium-term outlook on yields and interest rates. You don't need to be an expert, but do make sure you know why you're investing into what you are!
Tinkering with your investments too often
Good investments usually do not reap rewards overnight. Sometimes, you'll have to wait several months (or even years!) for the market to catch up with you, in case of deep value stocks. Similarly, you may invest in a piece of land that will take a few years to start appreciating, after industrial and residential activity approaches it by spreading outwards from presently buzzing centres. If you've invested into something after doing your homework, you should stay put unless something changes fundamentally. Don't fall prey to the pernicious "action bias" - the natural behavioural tendency to "do something" with your investments (which, by the way, gets amplified by real or notional losses). Coolly evaluating your portfolio once a quarter is more than enough - anything more frequent is really an overkill.
