April 1st, All fools day or Smart investor day?
April 1st marks the beginning of the new financial year. The ‘infamous’ day is also the one when we ought to set clear financial plans for the next one year. We can, of course, choose to celebrate April 1 as “All Fools Day” if we continue to commit the same mistakes that we did in previous years. Instead, we should convert it to a “Smart Investor’s Day” by learning from our financial mistakes. Given below are my confessions as well as resolutions for the new financial year as a retail investor.
Set your objective and stick to it
We often invest in multiple asset categories to create our investment portfolio. Our obsession to generate good returns from our portfolio cloud our investment objectives. Portfolio performance is more complicated than simply looking at “how much I started with and what do I have now.” We should put portfolio performance in a context relative to our investment goals, risk tolerance, and the investment climate for the assets invested. We should also note that past performance does not necessarily indicate future results. In chasing returns, I somewhere lost track of my investment objectives.
Resolution 1 : Understanding why I am investing is the first step in structuring my portfolio. I should develop a clear understanding of my specific needs and goals.
Head over Heart
It is said man is governed more by the heart than his mind. I too have been attached to specific companies and continued owning these scrips without regards to their fundamentals. I even went to the extent of topping up when they declined in order to reduce my average holding cost, whilst ignoring their fair value.
Emotions are hard to ignore. I am not immune to that. But following my emotions did cost me dearly last year.
Resolution 2 : Eliminate emotions from my investment decisions. I will not follow the herd and keep focus on the fair value of my stocks and will accumulate only if their fundamentals are intact.
Investment strategy and risk tolerance
Understanding risk is an integral factor in your investment strategy. The max-loss rule of risk tolerance states that you should be prepared to accept a loss equaling half of your equity allocation.
The euphoric rise of Indian stock markets during the secular bull run from 2003 to 2008, had made my portfolio extremely aggressive. The fact that I participated in this bull run mid-way forced my subconscious to allocate more to equity. My greed had taken over my analytical assessment of risk tolerance.
Come 2009, and all theoretical rules were shattered. The market tumbled more than 60% from their peak making a huge dent in my (notional) profit and turned it into (notional) losses. If you can’t bear to lose 45% of your money, investing 90% of your portfolio in equities is beyond your risk tolerance.
Resolution 3 : I will never take exposure that is more than what I can endure as per max-loss rule. I will be honest while assessing my Risk Tolerance.
Don’t put all your eggs in one basket
When stock prices fell last year, for example, gold prices rose to a new all time high. Often when stock prices fall, bond and debt market deliver better performance because investors move their money into what is considered a less risky investment. So a portfolio that included stocks, bonds, and gold would perform differently than the one that included only stocks, only bonds, or only gold. I thought my portfolio was diversified with exposure to some large-cap and mid-cap equities as well as mix of equity diversified Mutual Fund schemes. But, at the end of the day, it was still equity-heavy. With markets collapsing all over the world, my holdings also lost money.
Resolution 4 : I will follow two steps to diversification. First, to spread my money among different asset categories such as equities, mutual funds, fixed interest bonds, gold, etc. Second, to further allocate those funds within each category to minimize risk of over-exposure to a single type of asset category.
Protect the interest of your loved ones
While investing, we asses our investment objectives, risk tolerance and investment climate. We often tend to ignore the risk associated with our health and life. Adequate insurance cover to safeguard yours and your family’s interest is needed against financial uncertainties that may result due to an unfortunate demise or illness. It is an integral part of your financial planning process that lets you protect yourself against everyday risks to your health, home and financial situation.
Resolution 5 : Unlike popular belief, insurance is not an investment, but a risk cover. I will reassess my insurance cover every year.
We all fall prey to one or more such traps while investing our hard earned money. For a good investor it always pays to follow a rational and well thought out long-term investment strategy, leaving out all of the “get rich quick” schemes that are so readily available in the marketplace.
My return on investment was the learning’s that I got from my mistakes.
He has authored several analytical articles on personal finance in The Times of India and The Economic Times. Being a finance geek and having been involved with internet since the early days of the medium, he was a great help and source of guidance while formulating personalmoney.in. You can know more about Manish at ManishMisra.com
Disclaimer : Manish has agreed to write in his personal capacity. Views, opinions expressed in his articles are his own and do not necessarily reflect the views of his employer.PersonalMoney.in