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Mistakes investors make without an advisor
Easy access to financial information on internet means that any investor can access a list of top performing schemes. Newer, easy to use online investment platforms have also taken the pain out of the transaction process. So do investors need expert guidance on financial matters?
The answer is a resounding yes. This is because an advisor’s role is not limited to identifying the best performing schemes; he matches client needs to right investments and helps them make wiser investment choices.
Here are seven investment mistakes that clients tend to make without the guidance of an advisor.
Saving but not investing:
Most individuals save a certain portion of their earnings. However, these savings are often lying idle in their bank accounts. Owing to their busy work-schedule, investors may not get time to immediately research and invest their savings.
A financial advisor helps investor channelize his savings into investments. By helping an investor budget his earnings and expenses, he reduces the amount of cash lying idle in bank. In short, an advisor helps investor manage his money better and invest more.
Starting late:
Delaying financial planning is quite common amongst investors. Goals like retirement and financial planning for a family seem far away for a millennial investor. However, many of them forget that time is the best friend of investments. Starting early gives investors more time to accumulate the required corpus. It allows them flexibility to stop or adjust their investments temporarily in case of an emergency. Starting late can put a financial burden on investors, as they will have to save more to reach their key financial goals such as retirement.
An advisor helps individuals identify their goals at the beginning. He also creates a roadmap to help individuals invest wisely to achieve their goals.
Overspending:
Often people splurge their earnings on items they really don’t need. Through a discussion on financial goals, an advisor can help the individual visualise the corpus he needs to accumulate to fulfil his financial dreams. This may encourage an individual to invest rather than spend frivolously.
Wrong investment choices:
Wrong investment choices do not just refer to investments made in a ponzi scheme; it also includes investments made out of line with an investor’s risk-return profile. To elaborate an investor may consider himself to be a risk-taker and invest in high yield bonds. Alternatively, he may invest majority of his corpus in equities. However, in reality his personal responsibilities and goals require him to take a more conservative approach. This is an example of a wrong investment choice.
A financial advisor makes a holistic evaluation of the investor’s risk tolerance, liquidity needs, goals and income before recommending an investment. This analytical and exhaustive approach helps advisors recommend the most suitable investment options to their clients. Moreover, an advisor can also help warn you against any investment scam.
Investing based on preconceived notion:
Our friends and family members often influence our investment decisions. For example, a young professional may invest majority of his money in gold and FDs just like his parents. He may shun equities having seen his relatives lose money in day-trading. However, based on risk profile and age, he may be better off investing in riskier products.
Financial advisors can help clear any investment related misunderstandings from the minds of investors and guide them on making better investment choices.
Letting behavioural biases influence their decision:
Selling off their investments during a slight market correction, holding on to loss making investment, ignoring research which does not align with the investor’s view are all examples of behavioural biases influencing investor’s decisions.
Advisors can help investors identify these biases and encourage them to stick to their financial plan rather than acting under the influence of emotions.
Taking too much debt:
Many investors dream of building their own home or buying a car. Generally, investors fund these purchases through a loan or EMI. If the amount of debt is not kept in check, it can balloon and become unmanageable. Excess debt may also hurt an investor’s credit score which in turn lead to higher rates on future loans.
By budgeting their income and expenses, advisorshelp evaluate whether an investor can comfortably service a loan.