I was recently asked in an interview, “What is the most common mistake made by new mutual fund investors?” The short answer is not understanding the nature of the stock market. Even experienced mutual fund investors are also guilty of this.
Many mutual fund investors expect excellent performance every year. So when they see a fund performing extremely well, they invest in it. Irresponsible media articles also play a big part in this. Similarly, when they see underperformance, they wish to avoid it.
Like in life, ups and downs are part and parcel of investing. What goes up (down) never stays up (down). We must learn patience when returns are poor. The best way to eliminate the frustration of underperformance and the euphoria of outperformance is to stick to simple index funds – Nifty 50 or Sensex will do. Add a little Nifty Next 50 if you need to scratch that FOMO itch.
An investor who keeps getting attracted by the outperformer of the “month” will soon end up with a di-worsified portfolio that resembles an expensive index fund. We must learn to appreciate that our portfolio will not always have winners all the time. And there will also be some funds that are better than ours.
We must appreciate the cyclic behaviour of the market. If some theme or idea has already generated a lot of returns (which is when we often read about it), that is the worst time to invest in it! Ever notice we only get FOMO by looking at outperformers? You are then better off missing out!
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Stock market returns are clumped. You get a few very good years and then a few bad years. The best way to “time” the market is to be in the market at all times. Systematically investing in a balanced asset allocation and systematically increasing our investments each year is the most important wealth driver.
For the equity component, buy a sector diversified large cap index fund like the Nifty 50. Nothing more is needed. Focus on disciplined investing. Focus on personal and financial goals. Look at your portfolio once a year for a goal-based review lasting no more than 30 minutes. Rebalance as necessary. Reduce equity allocation gradually, well before the goal deadline.
Most importantly, indulge in a hobby other than finance and investing. That will prevent us from cluttering up our portfolios.