Investment Blog

One of the biggest enemies of success in life and investing is short-termism.

Short-termism or myopic thinking refers to making decisions based on what is happening at present instead of taking a longer-term view of future prospects.

It’s a highly common phenomenon and that is why there are more failures than successes. A person who makes decisions looking at the long term would always have an advantage over those with short-term thinking.

Some of the most common examples of financial mistakes people end up making due to short-term thinking that have the potential to ruin their financial future:

1. Buying a house based on the EMI amount of today: The EMI amount is calculated based on the market interest rate at the time of applying for loans. People evaluate if they can manage the EMI from their current income minus lifestyle expenses. All is well and good. The problem, however, starts when the interest rates start going up. This usually happens when interest rates are already at the lower end of the historical range. Interest rates have a strong correlation with inflation. Rising interest rates result in a higher EMI amount or increase in the loan tenure. In either case, you end up shelling out more for the property than you estimated. Worse, rising inflation increases your lifestyle expenses and thus squeezes your disposable income. You can safeguard yourself from this trouble by evaluating if you would be able to comfortably pay off EMI had interest rates were 3-4% higher than what’s available to you today.

2. Buying/selling a stock based on current news: Investment decisions should never be based on the breaking news but always on the long-term business fundamentals and valuations. A rising/falling stock doesn’t mean that it will continue to follow the same trend over the next 5-10 years. A stock giving negative returns is not a reason to sell and a stock giving positive returns is not a reason to buy/hold.

3. Investing in get-quick-rich schemes: Get-quick-rich schemes are mostly a scam disguised as a low-risk lottery. Successful people understand that successful investing and building wealth is a process that takes time. Gullible investors look for quick gains without going through the grilling process.

Making decisions on the present situation is enticing as it saves you from thinking hard over the long term. Many a time it is also due to the lack of expertise and understanding of how finances work thus unknowingly you put yourself in the trap.

In such situations, the best thing you can do is ask unbiased fee-only financial professionals which can save you tons of harassment in the future. And the fee for such advice is worth a penny spent for a dollar saved.

Originally posted on LinkedIn: www.linkedin.com/sumitduseja