Anatomy of a bad investment
BAD investments or wrong investments are a part and parcel of any portfolio. Broadly speaking, there are two reasons why they happen.
One, of course, is market conditions. Say you invest in a share after due research, but the company fails and you lose money. Or you have a fixed deposit (FD) in a co-operative bank, which runs into problems and your money is stuck. Or you invest in a five-year FD and, immediately afterwards, the rates are revised upwards.
These situations are beyond your control. These are market risks which are part of any investment. You win some, you lose some!
The second reason has to do with your own decisions – your knowledge, your psychology, your research, etc. These factors are under your control. If you exercise this control diligently, you can keep away from bad or wrong investments.
The idea is not to get defensive but to understand the reason(s) and make sure you don’t repeat the mistakes. Here are the top five:
1. It’s greed, of course
Call it the get-rich-quick mentality, double-my-money-soon or maximum-returns-in-minimum-time. In one word, it is greed.
How many times have you invested in a scrip just because someone tips you that the investment would double soon? Or you wrote a cheque because someone offered high interest rates?
When someone talks about giving returns which are higher than the average market returns, he will not give it out of his pocket. He will take unduly high risks with your money or he simply has no intention of returning your money.
More often than not, you lose money in such so-called high-return schemes. The simple rule is to invest where the returns are more or less in line with market realities.
2. The fear of losing
I don’t like losing money. You don’t either. No one does. But does that mean you should sweep money under the carpet and not invest it?
Every investment has a certain risk associated with it. Okay, so you consider equity as risky, and public provident fund (PPF) as safe. You can’t be more wrong in this belief.
A few years ago, I invested in PPF assuming I would earn 12% pa returns for 15-years. But the government started reducing the rates. Now, it earns just 8%. If this isn’t interest-rate risk, what is?
Similarly, those who simply invested in the Sensex over the last 15 years never lost money. In fact, they made a decent 15% pa returns.
The idea is not to run away from risk. Understand it, appreciate it and manage it. This will help you make the right investment choices.