Lesson #9
Have you seen the movie Kai po che?
Do you know it is based on Chetan Bhagat’s book 3 mistakes of my life?
Here’s a question for you – “What about the 3 investment mistakes of your life?”
When this question was asked to Vijay, this is what he said.
“First, I never paid attention to how much should I invest in what. Initially, I put almost all my money in Fixed Deposits. Then I bought a house for investment. Of course, there was my father’s friend who sold me a few insurance policies.
Second, my exposure to equity began very late. I also got hooked on to stock trading with the idea of making quick money. Only after losing money did I realise that it was not my cup of tea.
Finally, I put in a lot of time and effort every month to invest my savings. There were times I forgot to invest. I didn’t realise that so many things can just be simply automated and one can save so much time.
Well, Vijay has the courage to accept mistakes.
Would you be surprised to know that most investors continue to make the same mistakes?
It is likely that you have already made them or are likely to make them too. Well, not really, if you know what are they.
So, here they are.
Mistake #1: Don’t pay attention to Asset Allocation.
Lots of random investments based on half-baked advice from friends, family and relatives is what you build your portfolio with. So, one finds several fixed deposits, PPF, EPF, money-back and endowment insurance policies, some stocks or mutual funds.
In one case, an investor thought he was investing a decent amount of money, which is alright. But what was not right is the places that money found its way to.
As usual, Fixed Deposits ruled the roost, then real estate, PPF, etc. When it comes to equity, it was just about 6% of the portfolio. The portfolio is inadequate to cover inflation let alone beat it.
For his age, that is totally inadequate. On top of that, he is thinking of buying one more property so that he can reduce his tax outgo by a few thousand rupees.
An investor’s biggest weapon to create wealth is asset allocation. Get that right and you will be very well on your way to financial freedom.
Mistake #2: Count lots of activity as an investment strategy.
A lot of young investors who want to invest in equity get this idea that the way to make money from the stock markets is by trading. Stock markets are a sort of a roulette machine for them. You have to make your bets and you could well be the next Rakesh Jhunjhunwala. And at their service is the “stocks tips” industry that helps them punt their money.
Most of these, so called investors, actually punters, lose money. Usually that is their very first experience and it makes them averse to investing in stocks and equity. Feels sorry for them!
Here is another example. One investor keeps buying new set of mutual funds every month. When counted there were about 18 different funds in the portfolio. This was a clear case of over-diversification.
Now, a mutual fund already has a portfolio of stocks, sometimes close to 100. All mutual funds mostly invest from the same universe of top 500 stocks. And you have 18 such funds! It could only mean that you have several major overlaps in the stocks in your portfolio. Even if you were trying to take benefit of various strategies or fund managers, this is still too much.
Yet another investor was considering investing in a ULIP. He wanted to add a new investment to his portfolio. Since he already made investments in mutual funds, he wanted to try the ULIP. Now, why would an additional product make more sense than backing the winners in your existing portfolio? It beats common sense!
All good things in life have to be developed organically. One has to be a farmer and not a hunter. It is true for investments too.
If you find yourself spending a lot of time with your investments, then you are definitely doing something wrong. You need to focus and get your investment strategy right.
Mistake #3: Don’t automate investments.
As Vijay said, he spends a lot of time and effort in figuring out which investments to buy and when. Take the case of investments in mutual funds. These are real life examples.
The investors don’t start systematic investment plans. One of them said he is not sure about the surplus every month and hence makes the investments based on what is available.
The other one says he likes to pick his investments every month. With SIP, he will get blocked into the mutual fund schemes he has chosen. But by doing it every month, he gets to evaluate it afresh. So, he sees what are the schemes that have delivered the best 5-year returns and invests in them. He is the same person with 18 funds.
Mind you both these people are salaried, that is a fixed cash flow every month. Deep down both want to time the market. Market timing is another big disease that a lot of retail investors suffer from. Market timing is a never ending abyss. And most of the times, you will find yourself succumbing to your own biases and investing at higher market levels.
Even if you are not sure of your total surplus, pick a smaller amount and commit monthly investments to it. If you have surplus, you can always add to your investments.
Based on 5 year returns, the fund list will change every time. And using that as the only parameter is absolutely the incorrect way. There are set of factors to select your mutual funds that you should look at than just one, returns. In fact, chasing returns is the biggest investment mistake.
Automation is your winning strategy. Automation brings in the discipline that you can never hope to get otherwise. Be it paying your bills, making your investments or setting reminders for your spouse’s birthday – automation will save you every time.
What more mistakes have you made or seen others made?
This note is a part of the free course – Investing 101. Want to receive other lessons of Investing 101 on email?
