9 Types of Investing Mistakes Youngsters Should Avoid
The youth of today, that is, Gen Z (Born between 1997 and early 2010) and millennials (Born between 1981 and 1996), are stepping into adulthood. Born in the era of digitalisation, this generation is proficient with technology. With the availability of information at their fingertips, the youth of today is highly growth-oriented. As per the 2022 Investopedia Financial Literacy survey, young adults between the ages of 18 and 25 are more financially sophisticated than previous generations at their age. This is a testament to the desire for growth amongst young adults. However, being financially sophisticated also means indulging in complex investment instruments, which can eventually lead to financial setbacks. From not choosing the right investment product to not seeking guidance, young investors make numerous investing mistakes. Here is a list of 9 mistakes that young investors should avoid.
Mistakes Young Investors Should Avoid
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Not Choosing the Right Investment Product
When it comes to investing, a plethora of investment avenues are available in the market, ranging from highly risky avenues like options and futures to highly conservative avenues like fixed deposits. Choosing the right investment avenue is of utmost importance. Young investors generally have a higher level of risk tolerance and, hence, indulge in experimenting with risky investment avenues. A report by SEBI states that there has been a surge in participation of young individual traders aged between 20 and 30 from 11% in FY19 to 36% in FY22. Moreover, the report also stated that 89% of individual traders in equity futures and options incurred losses, meaning 9 out of 10 lost money through options and futures trading. (Source - SEBI Report on Analysis of Profit and Loss of Individual Traders dealing in Equity F&O segment)
Investors need to choose an investment product that strikes a balance between risk and return. An equity mutual fund allows one to participate in the stock market and build reasonable wealth with peace of mind. A mutual fund allows numerous investors to pool their money, which is then professionally managed by a fund manager. Since mutual funds provide the benefit of diversification, they are inherently less risky than stocks since the company-specific risk, that is, the idiosyncratic risk, gets cancelled out. An investment of Rs 10,00,000 made 25 years ago would have helped you build an approximate corpus of Rs 1,96,02,707 as of today. (Assuming investment in Equity Fund and an average return of 12.64% p.a. as per AMFI Best Practices. Guidelines Circular No. 135/BP/109/2023-24 dated November 01, 2023. Past performance may or may not be sustained in the future.) Hence, mutual funds can be a good choice for young investors as they provide a balanced trade-off between risk and return.
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Starting Late
Young investors tend to procrastinate due to the belief that they don’t need to start investing early since they still have a long way to go. However, this delay not only shortens the investment horizon but also causes them to miss out on harnessing the long-term power of compounding. The earlier you start investing, the more wealth you can build. If you had started an SIP of Rs 10,000 25 years ago, you would’ve built an estimated corpus of Rs 1.88 crore today. However, if you had started this SIP 15 years ago, then you would’ve only built an estimated corpus of Rs 50.27 lakh today. Hence, it is imperative to start investing early to gain the maximum benefit of compounding. (Assuming investment in Equity Fund and an average return of 12.64% p.a. as per AMFI Best Practices. Guidelines Circular No. 135/BP/109/2023-24 dated November 01, 2023. Past performance may or may not be sustained in the future.)
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Speculating
Short term-trading based on speculation can lead to losses and missed opportunities. Since April 1979, there have been about 10,000 trading days. However, the best 100 days have generated 100% of market returns. If you had not been invested in these 100 days, your investment would merely be 0.85%. Such days occur randomly, and It is nearly impossible to predict these days in advance. Hence, the best investment strategy is to follow fundamentals, avoid speculation, and stay invested in the long-term. (Source - BSE. Data for the period 3rd April 1979 to 30th November 2023. Past performance may or may not be sustained in the future.)
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Not Setting Clear Financial Objectives
One of the most crucial mistakes young investors can make is not setting clear financial objectives. Without a clear financial destination, investments might lack a clear direction. To avoid this, young investors should set SMART - specific, measurable, achievable, realistic, and time-bound financial needs. With a clearly defined purpose, investors can construct a well-defined investment strategy and give direction to their investments.
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Being impatient
Patience and consistency while investing are extremely important. The path to building wealth through the stock market is a path filled with ups and downs. Since April 1979, the stock market has gone through many bull and bear runs, including the Harshad Mehta Scam, Dotcom Bubble Burst, Global Financial Crisis, Global Weakness, and COVID-19. However, despite all the falls, if you remained invested, you could’ve grown your wealth by more than 500 times. (Source - BSE. Sensex Price Index used to calculate market returns)
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Chasing instant gratification
The world today is highly interconnected. With the availability of social media, you can speak to your friends and relatives situated thousands of kilometres away. However, along with this boon, young adults can fall into the trap of comparing their lifestyles with others through social media. Such comparisons can make them greedy and may create a desire to chase instant gratification. Chasing instant gratification can impair investors’ ability to make rational investment decisions and make them take decisions based on emotions. Moreover, chasing instant gratification can lead to unfulfilled long-term financial needs. Hence, young adults should focus on fulfilling long-term financial needs rather than chasing instant gratification.
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Overleveraging
Young investors might sometimes fall into the trap of ‘get rich quick’ schemes. For this, sometimes investors might use borrowed money to invest, aiming to maximise their gains. While leverage can, in some situations, indeed magnify profits, it also significantly increases the risk of substantial losses. Young investors, often attracted by the rapid growth stories in financial markets, may underestimate the impact of market volatility and overestimate their ability to manage debt. This can lead to scenarios where a market downturn not only wipes out their initial investment but also leaves them burdened with debt. The lack of experience and financial acumen in managing leveraged positions can further exacerbate this situation, turning what seemed like an opportunity for quick wealth into a financial setback. Therefore, leveraging requires a deep understanding of risk management and a disciplined approach, which young investors might lack.
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Following trends blindly
In order to be a part of the herd, young investors tend to follow market trends blindly. Moreover, the fear of missing out (FOMO) and the influence of social media can further impact a young investor’s investment behaviour. However, this investment approach neglects the importance of a well-researched diversified investment strategy, making young investors susceptible to losses. Young investors must focus on fundamental investment strategy rather than being swayed by their emotions.
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Not seeking guidance
For a young investor, the primary source of gathering investment information could be via social media. However, investment should not be treated as a DIY (Do It Yourself) activity. It is something that needs guidance and a personal touch. Since every investor is different, a standard one-size-fits-all solution cannot be followed. Investors need to follow a tailored investment approach based on their unique needs. Hence, investors should seek guidance from an investment advisor or a mutual fund distributor in case of mutual fund investments.
To conclude, navigating though the world of investments could be complicated and daunting for young investors. However, if they steer clear of such common investing mistakes, they can eventually build wealth in the long-term. Patience, consistency, and choosing the right product are the essentials of investment. SIPs in mutual funds have become a popular choice for building wealth in the long-term with discipline and consistency. A small monthly SIP of Rs 10,000 started 25 years ago, would’ve helped you build an estimated corpus of Rs 1.88 crore as of today. (Assuming investment in Equity Fund and an average return of 12.64% p.a. as per AMFI Best Practices. Guidelines Circular No. 135/BP/109/2023-24 dated November 01, 2023. Past performance may or may not be sustained in the future.)
To invest in mutual funds, you can seek guidance from a mutual fund distributor (MFD). An MFD can understand the unique financial needs, risk profile, and financial position of investors and help them make informed investment decisions based on it. Young investors should always remember that investing in mutual funds is like a marathon. One needs to start early, prioritise long-term financial needs, and seek guidance to build a secure financial future. Hence, contact a mutual fund distributor and start your investment journey today!