During my entire career, I met a lot of investors who were deeply buried under mistakes they had committed to managing their financial investments. The biggest problem was they believed what they were told, or what they read on pamphlets or on TV. They followed quick gains techniques because each one of us is – speculators- to some extent. We know it takes the time to bear fruits and there is nothing called “investing to double overnight” but still we create a mess.
No one is perfect, and we all make mistakes. That’s a given. It’s the foolish mistakes that really impact the bottom line. These are so easy to ignore or one could just know that these are unwise, but still don’t avoid committing them.
Here are six foolish investing mistakes I saw happening on everyday basis:
- Chasing Daily Price/Performance
Investing in the equity market is a numbers game- agreed. But you want to see a return everyday otherwise you feel your boat is sinking. These investors often compare quarterly performances.
Often they would say “Last quarter return are so weak compared to last year! and I want to jump ship. Can we redeem?”. This short-term thinking often gets you nowhere and brings added costs.
We don’t like to admit it, but it’s often the boring buy and hold strategy that serves most investors best. As tempting as it is; don’t solely look at the most recent performance. Rather, look at how the investment works in relation to your overall investment plan.
Whether working with an advisor or managing investments on your own, focus on the long-term, not the day to day.
- Thinking You Can Beat the Market by being Active
The second most dreaded mistake besides chasing performance is believing you can time the market. In many cases, market timing results in investors selling low and buying high – the opposite of what we should be trying to accomplish. Year after year, decade after decade, it has been proved many times, that neither individual nor professional investors can outperform broad market indexes consistently over long periods of time.
Barras, Scaillet, and Wermers tracked 2,076 actively managed U.S. domestic equity mutual funds between 1976 and 2006. They found that after fees, three-quarters of the funds exhibited zero “alpha,” a fund’s excess return over a benchmark index. And —Only 0.6% — you read that right, 0.6% — showed any true skill at beating the market consistently, “statistically indistinguishable from zero,” the three researchers concluded.
- Overwhelmed with Media
The media are corporate houses and have no interest in your net worth, rather they would like to please advertisers
who help increase their net worth. By far the biggest mistake I see today is letting the media dictate how you invest. While the media is loud and comes from every direction today, they simply don’t know what’s in your best interests.
Many icons in the media sound like they know what they’re talking about but in reality, they know nothing of your particular situation, your assets, your portfolio construction and impact factors. This is why it’s so important to take what we hear in the media with little credence.
As Haynes points out, “…let your personal goals dictate how you invest; not the person on television who’s simply looking for ratings.”
- Investing in Isolation
You may get a product or a fund, but it’s not a plan based on your needs. You think just investing in mutual funds together, add a tax plan, sprinkle it with a Retirement Plan and buy a land ….and you have the perfect portfolio. You need to ask why are you investing in the first place? What are the goals you are looking to achieve? Most people just invest when a tax deadline is there or a new fund is on offer or a college is investing. These are just like window shopping. It just fills your wardrobe and not “make” your wardrobe.
- Not following the Diversification
Proper diversification is a must for value investing. It is spreading the risk. Sadly, too many think picking a small
handful of stocks or investing in 10 schemes, means they’re diversified, without realizing that they’re opening themselves up to significant risk.
On the reverse side, many investors think that because they invest in mutual funds they’re diversified. Little do they realize that if they don’t look at what those funds hold, they could own a group of holdings that leaves them more open to risk than they realize.
- Not Rebalancing your Investments
Investors are very much watchful of daily event related to investments like – a corporate action or policy decisions or elections but they forget to check their own investments for rebalancing.
Selling an investment is more of an emotional decision than buying one. So you know rebalancing would mean selling something, so you overlook this important activity. Also, the debate is – How often than should you check in on your investments? Since Indian Markets are more volatile, It is the must that you rebalance your portfolio once in 12 months. Neglecting your portfolio can bring emotional biases and you may continue to hold assets which may hamper your goals.
It is true that “People learn from their mistake” but this is also true that “wise man learn from what mistakes other people make”. In investments, you cannot afford to commit mistakes yourself. So just correct a few cents by tuning a correct response towards a pitfall.
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