Many investors make an investment and later realise that they shouldn’t have invested in the first place. If you are one of them, this article is for you.
Chris Gardner was a hard-working man who donned many hats. He was a businessman, a stockbroker, investor, and a motivational speaker too! But he had his fair share of troubles. He lost his life’s earnings trying to sell a product he invested in. He eventually realised that he shouldn’t have put all his money into the product. However, he didn’t hesitate to take up an unpaid internship in a stock firm. By the end of the internship, he landed his dream job.
Just like Gardner, if you’ve ever lost your hard earned money by investing in the wrong financial product, you can go in for some smart fixes and continue your pursuit of happiness. You don’t need to take drastic measures like Gardner did.
We’ll tell you how to do it.
Insurance
If you realise you’ve invested in the wrong insurance policy, you can use the free-look period to cancel it. The free-look period is a 15 day grace period that begins from the time you receive your policy document. Within this time, you can communicate your wish to cancel the policy. This applies to all Life Insurance policies and Health Insurance policies with a term of at least 3 years.
What if you found out later that the policy is not the one for you? You should ideally not mess around with insurance plans as they are long-term investment products with lock-in periods and premature redemption penalties. You can choose to surrender the policy or make it paid-up. It is best not to surrender the policy in the initial years as you might incur losses. If you don’t want to pay the premiums anymore, it is better to make it paid-up. In case you surrender and get back your money, consider buying term plans that are cheaper than other insurance plans.
Bought a Unit Linked Insurance Plan (ULIP) and found that too much equity portion ruined the returns? There is nothing to worry about. You can use the auto-rebalance feature available in most insurance-cum-investment plans to rebalance the portfolio and maintain the asset allocation that you want.
Additional Reading: ULIPs Vs Mutual Funds – What Should You Pick?
Mutual Fund
In the case of Mutual Funds, it is best not to make a decision until it has been at least 2 years since you invested. For Equity Mutual Funds, it will be best to wait for at least 3 years. Compare the returns from your Mutual Fund with that of its benchmark and peers. If it has consistently underperformed its benchmark and peers over the years, you can consider selling the Mutual Fund.
You should evaluate your Mutual Fund when there is a change in the fund manager, or in the fund management strategy, or the composition of the fund’s holdings. The same is true if the fund is being acquired by another fund house. The chances of underperformance might be high in these cases. Always consider the exit load and tax implications before selling any Mutual Fund.
Stocks
Just like Equity Mutual Funds, you need to wait for at least 3 years before you decide to sell a stock. You need to compare the performance of the stock with its peers in the same industry. You should also assess whether the industry itself is going through a bad phase. You must sell the stock only if it has under-performed compared to the industry average. This is assuming that you did research before choosing the stock.
You should always select the best stocks from different sectors after peer comparison and use ratios to assess the financial position of the company. You can also seek professional help to know the entry and exit levels. You must perform a periodic assessment of the performance of stocks and their quality and see whether they still match your risk appetite.
Is there a way you can minimise risks, you ask? Yes. One way is by setting limits. When buying stocks, ensure that you set limits on the amount of exposure to a particular sector. Also, within sectors, exposure to specific stocks can be limited. Sometimes, losses are possible in the short-term. Understand that stocks are long-term investments.
Is there any way you can avoid losses while investing in stocks? Of course! Here’s one.
You should keep a small portion – about 20% – of your portfolio for market crashes. This will help you buy quality stocks at lower prices. This method always helps average out the cost of purchasing stocks, especially if you hold a stock that has risen quite a bit. However, one shouldn’t go overboard with this strategy as holding cash and waiting for opportunities will mean lower returns.
Real Estate
Real estate investments are highly illiquid. Entry and exit from these investments is never easy. With stamp duty charges ranging between 5% and 15%, selling a real estate investment is a costly affair. You also need to take capital gains taxes into account.
So, don’t make hasty decisions while selling a real estate investment. Ideally, these investments take a minimum of 5 years to show gains, unless you are receiving income from the investment in the form of rent or lease money. It is best to take professional advice before selling your investment.
Additional Reading: Real Estate Investing 101
Gold
You can diversify your portfolio by adding gold to it. It acts as a hedge against inflation and economic crises and increases in value with the standard of living. If gold prices are falling, it is best for you to wait until prices stabilise. Gold is for the long-term and therefore short-term price fluctuations shouldn’t bother you.
You must restrict gold to 10%-15% of your portfolio. If gold prices rise, you can sell a part of the investment to ensure that gold doesn’t occupy your portfolio by more than the prescribed limit. If you have invested in gold through jewellery, understand that this isn’t exactly an investment. This is because jewellery has little resale value. You must invest in gold through gold coins and bars.
Now you know that getting back on track after making wrong investments is not that difficult. Every cloud has a silver lining. A little time, patience and knowledge can go a long way in solving your financial problems. Next time you run out of patience dealing with a financial problem, think about us!