Last Updated on August 2, 2020 at 11:17 am
There is an uncanny pattern to mistakes mutual fund investors make regardless of their experience. Here are five such common mistakes. Avoiding these can significantly help your portfolio.
1. Waiting for the right time to invest aka stopping investments at the wrong time. You might think investors ask this question because of the “current situation”. No. They ask it all the time – when the market is at an all-time high when there is a slump, bull market, bear market – all the time.
It is number one on the list because it is the number one wealth destroyer – procrastination, delay. There is no right time to invest. If your needs are decades away it matters little when you invest. Every day you delay from accumulating units or stocks, is a day that is gone forever.
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The way stock markets work is quite simple: It would not rain at all for years and years and then suddenly pour a decade’s total rainfall in two months. No one knows when it will happen or even if it will happen but it has in the past and that is all we can latch on to.
The point is when it does pour, you need to enough seeds planted. That is, you need to have enough mutual fund units or stocks in your kitty to enjoy the gains. If you wait for it to rain and then plant the seed, it would simply get washed away. Invest now!
Of course, you have to invest only if your needs are far away, have the right asset allocation, have a de-risking plan etc. All that is ok, but if you want your portfolio to actually move up significantly, you need to be invested at all times- that is the only right time. Solution: stop looking for the best time and best way to invest – it is the best way to waste precious real wealth: your time and health
2. Getting enticed by recent returns aka “PGIM India Global Equity Opportunities Fund gave 49.47% returns in the last year, is this a good fund to invest in?” When you see such a high return before you invest, it only means one thing: returns will drop from the day you started investing. If the grass appears greener on the other shore it means you are not looking hard enough at the grass where you are standing or worse don’t know where you are standing – meaning you are investing without a plan. Solution: grow up!
3. Getting excited over every 3rd new fund offer aka “Motilal Oswal has a new fund that would invest 20% in S&P 500 can I invest?”Let me give you an example from my portfolio. As we saw recently Parag Parikh Long Term Equity Fund invests about 20% in “international equity”. This fund constitutes 44% of my retirement equity allocation.
So I am actually holding only 8.8% of international equity in my equity MF portfolio (excluding about 8% direct equity). If I consider my full retirement portfolio it is only about 4.6%. So is my portfolio “internationally diversified”? No!
The point is if you see something new and exciting, you must hold enough of it make a difference. So if you like the Motilal Oswal Multi-Asset Fund, it can benefit only if it the only fund in your portfolio, not when it is the 21st fund. See: Are you suffering from Small Exposure Investor Syndrome? Solution: Start an information diet
4. Wanting to stay invested in a fund that performs at all times: This would be great if it is actually possible. Today’s stars are tomorrows character actors. This is true if you holding active funds or passive funds. A five-star rated index fund when you started your SIP can become three-started six months later. If you then add one more five-star rated fund SIP, your portfolio would get systematically cluttered. Occasionally there might be a fund like Axis Small cap that bucks the trend. To assume it would be able to do that, again and again, is childish. Solution: grow up!
5. Not investing enough: An investor might have enjoyed that 49% return mentioned above. That sounds great on paper but if it was only for a lump sum investment of Rs. 5000, then it does not amount to much. The point is, the return we get must also translate into a corpus big enough to meet our future expected and unexpected needs. Solution: Calculate future needs accurately; have reasonable expectations of risk and reward; choose an asset allocation you are comfortable with; compute the investment amount necessary. If it is more than you can invest now, then continuously reduce the gap.
6. obsession for safety or greed: Fear has the same effect on a portfolio that greed has. In fact, while the effect of greed can be seen immediately, the effect of playing it safe and avoiding day to day risk can only be seen decades later.
An investment portfolio must have the right mix of known safety and known risk (= greed). Like everything else in life, it is all about finding the right balance and yes that is hard! Solution: Find the right asset allocation for your goal.
7. leaving the fate of their investments to luck: When you see a mutual fund return illustration that says “15% annualised return over the past 20 years”, the only thing that is evident is “luck”. We have no idea the return we would get from equity investments. It could double-digits in positive or negative. Our future needs would always be positive. So we simply cannot afford to “start a SIP and hope”. Solution: decide how you are going to reduce risk in your portfolio systematically.
The mistakes may differ but the solution is the same: have a plan and stick to it. The key ingredient of investing success is not knowledge or intelligence. It is an unwavering discipline to stay the course. First, we need to learn what that course is though.
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