5 financial blunders to avoid and become richer in 2012

Most investors sell in panic, act like traders, don't understand the difference between price of a stock and its value, are not consistent in their investment strategy and deviate from their asset allocations that leads to wealth destruction, writes Ramalingam K.

John Bogle, Vanguard founder and inventor of index funds: Your success in investing will depend in part on your character and guts, and in part on your ability to realise at the height of the ebullience and the depth of despair alike that this too shall pass.

The Indian stock market's bellwether Sensex fell more than 20 per cent in 2011. And the so-called experts have predicted that 2012 will not be a great year for stock market investors either. But it doesn't mean that you should stay away from investing in stocks in 2012. Because many of these so-called experts were not very bullish about the market in 2009 when the Sensex skyrocketed 80 per cent after a steep fall to 8,500.

So instead of predicting the market you should understand the blunders you need to avoid in 2012 as an investor. That will help you make more money.

The author, an MBA (Finance) and certified financial planner, is the director of Holistic Investment Planners(http://www.holisticinvestment.in) a firm that offers financial planning and wealth management. He can be reached at ramalingam@holisticinvestment.in.

1. Don't sell in panic

John Bogle: If you have trouble imagining a 20 per cent loss in the stock market, you shouldn't be in stocks.

Warren Buffett: If a business does well, the stock eventually follows. 

This wisdom from the two legendary investors rightly applies to reacting in falls in the stocks with special reference to the recent fall of blue chip stocks like Reliance Industries, State Bank of India and L&T.

The nervousness and panic selling is absolutely uncalled for as these stocks would soon bounce back. We have seen it also as the Sensex shot up from 8,500 in March 2009 to 16,000 at the end of 2009 under the shadow of the global economic meltdown.

In most cases such tendencies are temporary even in the global market. Smart investors should best buy and not sell blue chip stocks during a market fall, once they are convinced about the fundamentals of the blue chip companies.

2. Don't act like a trader

Most investors take a calculated stand by making a thorough research of the stocks they buy. However these decisions seem to bring about insecurity at the slightest fluctuations. As a long-term investor you need not look at the price tag of you stock every now and then. You check the price tag once in six months.

Please don't forget that investors make money for themselves and traders make money for their brokers.

3. Don't buy just because it is cheap

Let's quote Warren Buffett again to bring out one more important investment flaw: Price is what you pay. Value is what you get 

All cheap stocks are not good stocks. All the fallen stocks will not rise when the market rises. Some investors thought that it was great to invest in cheap stocks. This is a great investment flaw. Investment decisions should be based on the value rather than the price of the stock alone.

Penny stock is another area that calls for prudence. Penny stocks are highly manipulative due low market capitalisation and low ownership. So it is easy for traders to place large buy or sell orders and quit the market after dumping stock, affecting investors.

4. Don't stop your mutual fund SIP

I do think Paul Clitheroe was right in quoting: I don't think investment is that hard. It's doing the simple things on a regular basis

Investors can benefit by starting and continuing mutual fund SIP plans for a long term.

Starting and continuing with the mutual fund SIP or systematic investment plans would help invest regularly without the risk of timing the market.It also builds up the habit of saving for specific goals. Many investors get anxious with the fall in stock prices and want to stop this regular investment.

However experts opine that mutual fund SIP started for levelling stock prices and returns would best help in down periods to get more number of units. Again it is best understood that mutual fund SIP provides for meeting long term goals like education and marriage of children and retirement. So stopping mutual fund SIP would defeat the purpose of meeting these goals.

Experience shows that equity mutual fund SIPs surely give higher returns than many other assets in the long run.

5. Don't deviate from your asset allocation

Asset allocation is the ration between how much you want o invest in risky assets and how much you want to invest in safe assets. For better wealth creation, the consistency of this ratio is more important. Once arrived at a ratio, you should not change or deviate from this ratio. By changing this ratio, you destroy the very purpose of asset allocation.

Generally investors will tend to give more allocation to equity when the market is on a bull run, and to debt when the market is on a bear run. This will reduce your overall return. So consistency of maintaining the decided asset allocation pays investors in the long run.

Avoiding these five financial blunders will make you richer in 2012.