November 19, 2019

दशम् हरति पापानि इति दशहरा।।

Heartiest felicitations for “Dusshara” or Vijay Dashami”. This festival is celebrated as symbol of win over sins. Ravana or Dashanana represents the ten sins of Kama-Vasana or Lust, Krodha or Anger, Moha or Attachment, Lobha or Greed, Mada or Over-Pride, Irshya or Matsara or Jealousy, Swartha or Selfishness, Anyaaya or Injustice, Amanavta or Cruelty and Ahankara or Ego.

In our lives we fall prey to these sins or evils, get a high for brief period before suffering their consequences. Each year on this pious day we reaffirm our resolve to try and win over these sins in our daily lives. Ever wonder we do commit similar sins with our investments. Let’s us discuss ten investing sins that we should resolve not to commit with our investment decisions.

Sin 1# – Investing without understanding the product – We generally tend to invest on hearsay or just looking at the past performance. Before making investment, understand the product well as to – where it invests, how the returns will come, what is the probability of failure, if there is any life cycle etc. If you don’t understand the product, don’t invest into it, however attractive, high yielding it may appeal. Warren Buffet says, “Never invest in a business you can’t understand.”

Sin 2# – Following herd mentality – Most of the investors who have burnt their hands in various investments are the ones who follow herds. As long as an investment option is available to select people, investors make good profits. But as soon as more and more people start chasing it, profit margin declines and turns into losses for late entrants who are part of masses. So avoid any investment opportunity which is chased by herd. “The herd tends to gather the most strength right before the investment it is chasing goes off the cliff.”

Sin 3# – Seeing volatility as risk and risk as volatility – Most investors fail to differentiate between risk and volatility. Volatility refers to price movement on either side of a product in the market because of a temporary phenomenon whereas risk arises due to deterioration in business. For investors who are not well versed with market dynamics and appreciate fundamental and technical analysis, should connect volatility to markets and risk to individual stock or bond. For mutual fund investors they shouldn’t worry much as long as they are invested in good schemes as they face volatility and not the risk. It is vice versa for investors who invest in direct equity or bond.

Sin 4# Making unplanned & complex investments– Every investor has some objectives to achieve in life that would require good amount of money like sending children for higher education or buying a house/car etc. They make investment based on the media reports or following friend’s portfolio or mastering the art reading few articles on website. Kinniry says, “A lot of people build a portfolio the way they collect things in their attic. This looks good, that looks good and they end up hodgepodge that doesn’t make much sense.” Also it is imperative for an investor to have a ‘Buy Plan or Strategy’ and it is more important to have a ‘Sell Plan or Strategy’.

Sin 5# Being Fearful – Most people become fearful when markets are doing badly because of any sentimental or financial factors. Market rides cycles in which a market starts from a lower values, achieves its highest value of that cycle before coming down. From there it rides another cycle and makes new high before coming down again. Usually a cycle takes around 3 months to 3 years to complete. So don’t fear if market is moving downwards to complete the cycle. Complete the cycle and prepare for the next one. Most successful investor of the world says, “Be greedy when others are fearful.”

Sin 6# Being Greedy – Opposite to being fearful is being greedy of a particular investment product. The same investment guru says, “Be fearful when others are greedy.” Usually whenever an investor invests in non-traditional investment product, s/he invests to earn some pre-determined returns over or within specific period. Most of the investors are governed by their representative heuristic psyche which do not let them sell the investment if it had achieved its expected returns. They become greedy and hold onto the investment unless that starts making good losses.

Sin 7# Not having a planned portfolio – All investment theories lay a lot of emphasis on diversification. It is achieved by constructing a portfolio. To construct a portfolio, first asset allocation is ascertained and then individual products are chosen to achieve required diversification within a particular asset class. Most investors do not do this. Their portfolio is built over a period of time by including products that come in their way and not planned to achieve their desired financial objectives. And also who are little aware or cautious they tend to over or under diversify their investments. There is famous proverb in Indian sub-continent, “Excess of everything is bad.”

Sin 8# Rebalancing the portfolio – Different investments perform differently that causes deviation in the asset-allocation from the desired one. Therefor a periodical review and rebalancing the portfolio becomes important. It should be done at least once a year. Some extraordinary events may warrant an early review and rebalancing of the portfolio. Rebalancing involves pulling out investments from an asset that has done better and put it into another asset that fared poorly in comparison. It essentially involves selling your winners and putting money into losers to bring back the skewed allocation to desired levels. Though very hard to practice, it helps you earn the expected returns from the portfolio and achieve your financial objectives. This never let you chase a hot product and gets you optimum returns and not maximum returns (an illusion).

Sin 9# Not considering tax, inflation and charges – All these three eats into your returns. Many people plan their withdrawals to be done over long term for example to meet expenses during retired life by keeping money into so called safe bank deposits. They fail to consider inflation and have tough times towards the fag end of their lives. Similarly many people opt for high dividend payout or interest income than using systematic withdrawal plans which are more tax efficient.

Sin 10# Depending on ‘Main Hoo Na’ advisor or friend – The worst sin probably. Never engage an advisor who says, ‘ Main Hoo Na’. This person might be one of the best advisors in the world. But s/he is an individual and may not be there when you need him/her. Engage an advisor who explains you the product and its risk and return prospect and who not merely says ‘Main Hoo Na’. Shun such advisor, even if he represents InvestmentMitra. One who do not explain the investment product and its significance in your portfolio and merely wants you to invest into on his/her saying – we term such person a sales man and not an advisor.

Financial Nirvana or Elysium – should you have made one or more such mistakes, don’t get disheartened. Everyone commit one or the other or more of these sins, so you are not alone. Prudence lies in the act that the moment you realize you have committed a sin, take a course correction. Resolve to win over that sin.

Once again wish you and your beloved ones a “Very Happy Duss-Hara” or win over ten sins from all of us at InvestmentMitra.

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