In the heady days of bull runs, we tend to make far more investment mistakes than in normal times. Sure, most of us make money when the markets are going up, but when the bull run gets over, we all have stocks and funds which we should not have bought.
It is an established piece of investing wisdom that to make money over the long-term, all you have to do is to make sure that you don't lose it. Or, to put it in a different way, you don't so much as have to do the right thing as you have to simply avoid doing the wrong things. Makes it sound simple, doesn't it? After all, avoiding the wrong things must be easier than finding the right things to do, no? Actually, if one looks at the real investing stories of real investors, it turns out that avoiding mistakes is just as hard, if not harder than doing the correct things.
And as it turns out, the kind of investing environment we have had in India over the last few years is tailor-made to induce mistakes. We had a deep slump in the stock markets, followed by a long and spectacular rise, interrupted by severe bouts of volatility.
And encouraged by this, all kinds of salesmen have been trying to hawk all kinds of investments. Every broker has tried to make his clients buy dubious stocks and fund companies have taken the opportunity to unleash a flood of intensively-marketed new funds. As a result, a lot of investments have been added and many have been exited by investors. Such reshuffling of portfolios is bound to change the complexion of investors' portfolios significantly. In the process, the macro view of the portfolio tends to get lost, leaving scope for errors to creep in.
From the ever-growing number of portfolios that Value Research gets for evaluation, we have identified the most common mistakes that we frequently come across. This article deals with the areas where many investors display a tendency to falter in their bid to build and maintain successful portfolios. The danger is that one may not take note of them while everything is going well. Hence, there is all the more reason to bring them to focus before difficult market conditions induce serious losses.
But before we go on, a word of caution. We do not intend to raise a false alarm over here. These are some general problems that we come across in many portfolios which may or may or may not apply to you. If after reading this article, you still believe that your portfolio is well-suited to your needs, then do not act needlessly. You should be the best judge of your portfolio and if you think its right, then nobody else should be dictating things to you. If however, some of the points mentioned here raise your level of concern, then timely action will certainly help.
A Piece-Meal Approach
The biggest and foremost roadblock to building a successful portfolio is the failure on an investor's part to look at the job of investing in a holistic way. Often people invest in a piece-meal way. Investments are not being pursued with proper planning and a goal in mind. Instead, factors like a sales pitch by a broker, or year-end tax planning and availability of surplus money at a given point of time guide one's investments. People judge the investment-worthiness of an avenue right at the moment of making the investment. Naturally, the conditions prevailing at that time guide their decisions. For example, if at the time of investment, stock markets are down in the doldrums, instruments like NSC become the best bet while if reverse is the case then they would get attracted to equities. No doubt then that their investments depict a complete lack of focus, and at best can be described as a collection of individual investments.
The Problem of Choices
Here we are referring to the problem of being invested in wrong companies (or funds) of the right type. Deciding upon the right asset allocation depending upon your objective and time horizon is undoubtedly the right starting point, but choosing the right investment is also very important. Investors have a tendency to get carried away with the hot-performers of the moment. We have always emphasised the importance of long-term performance. Your funds need not be at the top of the charts, but they should figure among the better ones across different market cycles.
Too Many Investments
This happens to be one of the common problems that portfolios suffer from. There are many reasons which can lead an investor to becoming a collector. Firstly, many of us keep adding investments in the name of diversification. Fund investors typically fall for the fake lure of getting units cheap and hence keep investing in new funds merely to get units at Rs 10. Yet another set of investors are misguided by their broker friends to invest in scrips that are projected to be just 'the right investment' in the prevailing scenario and are bound to become the blockbusters of tomorrow. Whatever be the reason, but remember, having a big portfolio ensures nothing else except complexity, which can be easily done away with.
While most investors have the problem of plenty, there are few other who are guilty of too much concentration. Letting just a few stocks or fund managers determine your financial fortunes might not be an ideal situation to be in. Ideally, a portfolio should have at least five to eight stocks from at least three distinct sectors. Fund portfolios should not have less then four funds, preferably managed by different fund managers.
This is a perfect example of how what is a good portfolio to start with can go haywire. The anxiety of missing out on the opportunity of becoming rich overnight in a bull run often induces even the disciplined investors to stray. These are the times when the greed takes over one's long term view of investments and he may start investing in funds and stocks which otherwise have no reason to be there in his portfolio in the first place. The money that was earlier finding its way into steady investments in a planned way suddenly changes direction towards some hot performing funds or stocks, thus harming a portfolio that was well on track for financial success. Review your portfolio and see if there are any such investments in a sizeable proportion that were made on the hopes of making some quick bucks, but really should not be there otherwise.
Out Of Focus
Most of the times, investing regularly in a few well-chosen investments is all an investor needs to do. But sometimes, these few good investments may not gel together well enough to form a portfolio suitable to an investor. The mistake that an investor commits is to look at the his holdings individually rather than as a portfolio. For example one might buy some good mid-cap stocks along with diversified equity funds to a portfolio. But if the diversified funds also happen to invest significantly in mid-caps, then the portfolio may become heavily skewed towards mid-caps stocks. The same can happen with specific sectors also. Therefore, it is important to view the break-up of your portfolio in totality before going in for any investment.
People start with a long investment horizon, and hence rightly maintain an all equity portfolio. Over a period of time, the investment horizon shortens, but the portfolio continues to be all equity. If the investment tenure of your all equity portfolio ends during a bull run, then you would definitely not be complaining. But the flip side can be unforgiving. Imagine having to redeem your money at a time similar to that of year 2000, when an average diversified equity fund was down 25 per cent. To avoid some unpleasant surprises, it is very important to pay attention to your asset allocation and move towards debt as the time to utilize the money approaches.
This is one mistake that often remains hidden. While selling one's fund units, tax considerations are the last thing on an investor's mind. However, on a deeper introspection, he may discover how much he could have saved from his tax payments merely by, say, deferring his decision to liquidate his investments by another month. A little planning here can help you make that extra bit.
If you find yourself guilty of committing one or more of these mistakes, then a corrective action is needed. But do not rush. Review your portfolio and ascertain what all things you need to do to get back on track and then act.