Now is the time to learn from investing misconceptions

Investing isn’t about making short term gains but creating the right balance which drives returns in the long term. Let’s take the case of 40-year-old Shivam, who was part of the Great Resignation Wave of 2021, and is now part of the start-up layoffs. Two years back, he moved from a company where he worked for over 7 years to a new-age company. The salary was 60% higher and he was swayed by friends and colleagues taking up startup jobs with fancy designations and packages. For the last two months though, Shivam has been struggling to figure out his finances and life as he looks for a job.

Shivam’s biggest problem is that most of his investments are either locked-in or are underperforming currently. Buoyed by his higher income, Shivam chose to invest in an under-construction apartment and a portfolio of trending investments: stock baskets, P2P (peer-to-peer) lending and cryptocurrencies. The flat has been put on sale and Shivam has exited the financial investments partially to take care of expenses.

Shivam’s biggest regret is that he did not set aside a part of his extra earnings for times like these. Looking back, he wishes he had just been a bit saner and not fallen for some common perceptions when markets are at a high. Here are a few misconceptions that one needs to watch out for.

1) Investing is easy: The pace at which share prices and crypto prices were moving upwards, it looked like an easy way to make money quickly. Add to that, stories across social media on how others were making a killing, led many to jump into investments they knew nothing about. The ease of transacting online only added fuel to the fire.

2) It goes only one way – up: When markets are in a frenzy, investors start believing whatever they buy will only move up. Despite all the warnings about cryptocurrencies lacking intrinsic value or not being asset backed, investors pumped in monies only to see currencies like Terra drop to zero and others drop by over 50% in a short span.

3) Old investments and methods are passe: During the IPOs of ecommerce companies, the methods of valuation were often debated. One camp of investors did not think the traditional valuation models could be used and the camp of “older” investors believed only profits drive stock valuations. I know of many young investors who moved from mutual funds to stock baskets due to better near-term performance in stock baskets, only to regret it now.

As Peter Lynch puts it, “An important key to investing is to remember that stocks are not lottery tickets”, investing isn’t about making short term gains but focusing on long-term returns. It is about putting your money in investments which beat markets consistently and compound over the long term. Fads will come and go but simple investments like index funds/mutual funds will always remain strong. The same investors who moved to stock baskets are now questioning the practice of regular rebalancing and the tax implications of the same. These issues existed with stock baskets when markets were going up but were not thought of as short-term returns overshadowed logic. But as Benjamin Graham, rightly put it, “Investing isn’t about beating others at their game. It is about controlling yourself at your own game”.

It is okay to try out new investments, provided you can afford to lose that money. But do not become irrational. Crypto fixed deposits were touted as an equally safe but higher yielding alternative to regular FDs. Those who delved further into the product found that investors were actually lending their coins and earning an interest. This is lending income and not FDt interest. Further, there is no deposit guarantee insurance on these deposits. Most cyrpto lending platforms overseas are under distress and are not allowing users to withdraw coins. The biggest risks come from not knowing what you are doing. Investors still have a chance to exit (even though at a loss) and protect further capital erosion. It is better to attempt course correction and build the right portfolio as market excesses revert to mean.

All investors should always remember a quote from Warren Buffett: “Be fearful when others are greedy, be greedy when others are fearful”!

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