Couple of weeks ago we had discussed about the negative perceptions of retail customers towards equity markets in India. This article is a follow up article to explore possible ways in which retail investor can avoid common pit falls that lead to disenchantment against equity markets.
Start asking questions :
Most investors do not ask pointed questions about any particular investment recommendation that has been given to them. It is not far-fetched to imagine scenario where a broker or an agent is offering a recommendation in claiming irrational and very high returns. It is important that investors ask for the reasoning and the proof behind such claims. It is the duty of the recommender to justify such claims. Not surprisingly, only 1 out of 10 investors ask such questions. Some Examples of such questions are:
a. What is the basis of your recommendation?
b. What is the time horizon to reach the expected returns and why ?
c. What are the risks involved?
Don’t lured by promise of high and quick returns :
It is very difficult for someone to amass a lot of wealth very quickly. Often it has been seen that our brokers, bankers and agents promise very high and quick returns. Investments into such schemes can never result in creation of wealth. They mostly result in significant wealth erosion. The only way to build substantial wealth is to bring some discipline into the investment psyche and stay invested for a long time. Short cuts never help investors reach their eventual goals.
Accept that you are not an expert :
Investments are always about a mixture of market knowledge, psychology, prudent awareness of risk versus reward. Not all of us are endowed with these skills. During a bull run many investors might presume that they understand and know the markets, but end up losing their hard earned money. Removing the perception that we are the experts can help the investors become better listeners and better at making decisions. Taking a professional’s help can go a long way in helping investors concentrate on what they do best and leave it to professionals to build wealth for them.
Long Term is not One Year :
Most investors presume that long term duration is One or Two years. The financial services industry has itself helped propagate some of these mis-conceptions. Ideally someone looking at long term investments should have a minimum duration of 8+ years in mind. Making buy and sell decisions on a daily or weekly basis only enriches the broker and not the investors.
As explained in the previous article, the market is not the villain. The current state is due to a whole host of factors including mis-aligned incentives of the industry vis-à-vis the customer, lack of knowledge of the product and behavioral conundrums that investors face on a day to day basis when it comes to wealth creation. It is time for investors to take things in their control and get the benefits of India’s growth.
Written By Arthayantra