In almost every aspect of your life, setting goals is extremely important because once you set a goal, you are more determined and focused to achieve it. Firstly, Investors should figure out the purpose of their investment and then, look out for the ways to improve investment strategy. 

As we enter 2021, the common mistakes while investing should be avoided to maximise the returns and minimize the risk. Some of these mistakes are discussed below:-

• Investing Without Knowledge

Far too often, investors invest in companies without understanding business models which result in entering into a business that they don’t understand. This happens due to the lack of financial education and wrong advice that is shared between friends and peers. Following such methods will never help you to achieve financial freedom. 

Remember, before investing in a company you should know what business the company is in. In simple words, never invest in stock instead of invest in a business that you understand. This investing formula is followed by almost every successful investor and has created a pretty good amount of wealth. So, it is important to understand a company’s business and then, investing accordingly.

• Bad Investment Choice

While doing particular investments in mutual funds, stocks, commodity especially gold, investors tends to judge the quality of a particular investment option based on ratings and past performances. But, these are not the only parameters to consider, even current performance is also not enough to guarantee the success rate of investment in future. Thus, investors should select an option which might work for them and increasing the chances of generating good returns.

• Investing Based On Emotions

The reason why investment returns are affected most is when investors let their emotions to rule, resulting in wrong investment decisions which may lead to losses. Investors should not let their fear or greed to control decisions instead proper research should always be done to reach the best decision. It is seen that patient investors get benefit from the irrational decisions of other investors and i.e, investors should focus on the bigger picture rather than emotions.

• Failing to Diversify Portfolio

Every investor should diversify their portfolio to have exposure across all the major asset classes. Different asset classes have risk associated with it and putting all your money in a single asset class will expose to a great amount of risk. The level of diversification should depend on the risk appetite of the investor. 

“Putting All Your Eggs in One Basket” is an age-old saying, simply means – Don’t make everything dependent on one thing. For instance, you put all your savings in a particular asset class and it does not perform then, the purpose of investment will not be fulfilled. 

To prevent this situation investors prefer to diversify their portfolio and to build a well-diversified portfolio, investors should not allocate more than 5% to 10% of the portfolio amount in one category. Successful investors always have a diversified portfolio to earn optimum returns on their investments with minimum risk. 

• Trying to Get Rich Quick Scheme

Investor’s portfolio accounts for all of their financial goals and needs, and to fulfil it, investors try several get the rich quick scheme. These schemes are the reasons why the returns on investments are affected and investors get trapped. It takes time and dedication to learn from mistakes instead of chasing quick return schemes which may face severe losses. It is also important to keep in mind that a market-based instrument and traditional instruments create wealth over the long term and becoming a millionaire overnight is not possible.