By Kunal Sawhney, CEO, Kalkine Group
People often find it difficult to factor in the risks when it comes to investing in shares, mutual funds, debt instruments or other market-tradable securities. Typically, the consistency in the historical returns over some years drives many individuals to believe that a particular asset will continue to deliver such a rate of return in the upcoming duration.
Ascertaining various limitations and risks with investing becomes more important at a time when every asset has turned highly volatile due to the repercussions of the still-evolving coronavirus pandemic. As most of the enterprises remain susceptible to the near-term developments in the Covid activity, the various unbearable mistakes with regard to money management should be avoided in order to safeguard your liquid money, which can be utilized during an unforeseen emergency.
We take a look at four such money mistakes that should be strictly avoided when the pandemic is taking a U-turn in many developing, as well as developed economies, especially the UK, following the steep resurgence of coronavirus cases associated with the Delta variant and other variants of concern.
Diversification of the asset pool is always advisable for all investors, no matter if you’re a retail participant or have the capability to buy a sizable stake. Diversification of assets certainly minimizes your overall risk by spreading the uncertainty to various assets. A person invested in about a dozen of different securities of varied nature can make an ideally diversified portfolio, but the number of assets and the specific securities you choose should remain well within your controlling limits.
Inferentially, you should not over-diversify in order to beat the market uncertainty. It will only lead to unforeseen damages as no human being can actively tap a large number of assets, nor can they track all the developments which may or may not affect the respective asset type in which you have invested or planning to allocate money.
Therefore, you should only invest in the assets that you can control or manage during the predefined period of your investment. Unnecessary diversification will cause more harm than it will benefit as some securities will remain unscrutinized during the course of investment, and you may never know when there will be a big correction in the indicative market prices or the underlying values of the assets you are holding in the portfolio.
Increasing proportion of risky assets
It seems quite easy and lucrative as well to make quick money in a shorter period of time. By only looking at the past performance of the assets, individuals hurriedly decide to invest a considerable amount from the funds they have or may be the entire chunk in a desperate attempt to join the bandwagon of people who have already made fortunes by investing in risky assets.
Higher the risk on investment, the higher can be the return. But the relative ideology doesn’t translate into profit all the time as the assets have the liberty to move either side. Given the uncertainty and deprived commercial operations of most of the businesses, there are higher chances that an asset may depreciate sharply in case of heightened volatility on account of a major disruption caused due to the unfolding nature of the coronavirus.
Investing on borrowed money
Nobody can time the market, even the big-ticket institutional investors. The only thing we can bank upon is the chances in connection to a certain event. Considering the large number of factors that can affect the market prices of a security, it could be way better if you invest the money which you are comfortable in losing by a certain extent.
But it has been observed that people who have been following the markets often want to maximize every opportunity that can provide multifold returns. Assuming that you are 100% correct with your intuition and the analysis you’ve done studying a particular asset. There is still a certain chance that your prediction or the well-calculated estimation may go wrong due to highly unpredictable events that have become very common these days.
Therefore, investments should not be made through borrowed money as you may end up paying unwanted interest charges according to the stiff repayment terms of the banking partners, even in the current regime of low-interest rates. Investing on borrowed money is a strict no, whether you have taken a loan, a short-term credit facility at low rates, money from a friend or family member or a loan against any other valuable asset.
Repeatedly exceeding budget
Overspending has been one of the most traditional mistakes of many individuals, following which they tend to miss on periodic investment that they have started with a financial entity. If you are exceeding your budget month-after-month, then there is a definite possibility that you may end up exhausting your retirement kitty and other reserved funds designated for the emergency.
Forget about missing the timely payment for policies and other instruments, the ingrown habit of spending beyond your earning capability can have a hazardous impact on your financial health.
Buying unnecessary products or incurring huge amounts for availing of inessential services in a time of uncertainty can hamper your monthly budgets, following which you are highly likely to default on an existing debt obligation, miss a credit card bill, miss a periodic payment for the mutual fund scheme and may go broke much before the month-end.
These situations will lead you to borrow more, that too on high-interest rates that will ultimately eat all your forthcoming earnings if the habit remains uncorrected for a longer period of time.
This is a Contributed Article