Managing money itself is a big challenge. The problem with saving, investing, money management and planning for the future is a common talk of the town, widely discussed and debated. However, many people don’t invest, either because they think it’s risky or because they don’t understand it. Inflation is one factor that can erode most of the lower return conservative investment instruments in the long run. Most investors make decisions based on the nominal rate of return without knowing the real rate of return. Hence, one needs to have a proper investment plan which can survive inflation and other such factors disrupting their financial goals.
Here are some of the challenges that first-time investors struggle with:Lack of thorough knowledge- This has caused investors to lose money before making any. Many ordinary investors do not know the reasons why the stock price is going up or going down particularly of small and mid-cap companies, due to a lack of sufficient and timely information. This prevents them from making appropriate investment decisions.
Unknown risks- New investors may not know about the hidden risks in many seemingly simple investment strategies. This can cause their portfolios to take a large hit. To battle this drawback, it’s important to be as informed as possible. Make sure to be familiar with the risks involved with margin, leverage, options, futures, etc., before considering them as an investment option. It’s important to learn about your risk appetite before making any investment decision.
Over diversification- Many new investors feel they need to invest a bit in everything to shield themselves from risk. However, over-diversification can significantly stunt your portfolio’s growth. It is often best to pick 2-3 options to invest the majority of your portfolio in keeping your goals in mind. Blindly following the crowd- Each person has different investment goals, risk tolerance and capital. New investors generally lack the belief or courage to take decisions based on their own knowledge or judgment. As a result, they exhibit mass mentality or follow the crowd. Such a mentality leads to mediocre returns or losses for common investors.
Limited capital- One of the biggest challenges that new investors face is having limited capital available to invest. New investors are mostly youngsters. Since it’s just the beginning of their career, their capital is limited. This is only compounded when certain financial instruments are too expensive. However, these issues can often be solved by looking into “partial shares.”
How to Get over these Challenges? Proper financial literacy- The most important aspect of financial planning especially as a beginner is financial literacy. Before investing in anything, it is crucial to gain some relevant information and make informed and well-evaluated decisions based on proper research. Without it, the decisions that you make or do not make can threaten your financial security since it lacks the solid foundation required. The financial market changes very often and is full of surprises.
Set financial goals- You cannot choose the route without knowing the destination. Before starting your investment journey, create an ultimate goal. Try to identify your needs and desires and accordingly ask yourself questions repeatedly until you get a clear goal. A good way to start is to start defining your goals and quantifying them in terms of the amount and the time you want to set to achieve the goal.
Start small and be patient- As a beginner, it is best to keep your investments simple and small on the basis of goals and requirements in the future. Start with amounts of cash that you can bear to lose and not risk excessively while learning. As you watch your equilibrium develop, you’ll become more open to contributing more extensive totals in the event that you can stand to.
Prashant Sawant is the Co-founder of Catalyst Wealth. The views expressed in this article are those of the authors and do not represent the stand of this publication.