I am not sure if these are the biggest investment blunders…but here is my take:
- Not understanding portfolio risk: ‘Equity’ is risky. ‘Mutual funds means equity’. ‘You have benefited from equity, does not mean we will. ‘Sip does not always work’. These are statements I hear regularly. To me all this comes from not being able to understand terms like portfolio volatility, inflation risk, real return, and knowing why equities give superior returns. Once a person understands all this, his/her attitude to risk and their own portfolio changes, and changes dramatically.
- Not diversifying enough: Too much in equities is just as dangerous as not being in equities at all. So I do see portfolios of 57 year olds with almost nothing in debt and all the money in equities. This is called concentration risk and has some very expensive downside risk. Too much debt portfolio, too much real estate, too much equity are all bad..one needs a balanced portfolio.
- Buying into asset bubbles: It is almost impossible to ask people to come out even partially when a bubble is being built up. So when the equity markets are iffy people pull out and invest in Real Estate. Currently seeing 3-4 people struggling with big RE portfolios unable to liquidate at a previously prevailing price. They may either bite the bullet or wait for a much longer period after which to sell.
- Wrong usage of leverage: Using stock options to make a quick buck sounds good on paper, but normally backfires. A person who does not spend time learning about investing cannot use leverage based on what his RM says. I see RMs of big brokerages, and they have no clue on how leverage works. So margin trading, leverage, options, …are all damned risky and completely avoidable. Ditto for buying real estate on leverage depending on the rent to pay the EMI..when a flat is kept locked for 4 months, the negative spiral hits you real bad.
- Conflict of Interest: Your bank rm, your ifa, your broker rm…all of them are making money from you. That is fine. If you cannot align your goals to their money making goals, YOUR interest is likely to be compromised, not theirs. If you do not know that Wealth Managers have sales targets, you are missing something. Something big.
- Not doing your homework: “I do not have time”, Finance does not interest me, “Subra I come home at 11..do you think I will do all this” – fine. Please take time to find an IFA, spend an inordinately long time to select and choose. However once chosen stop double guessing his intentions.
- Emotional Bias: My father made money in equities, so I should be in equities. True? no. If you will not find time, and inclination for direct equities shift to a mutual fund. ‘My father lost money in Harshad scam, Ketan scam…..see who made the mistake. Sit and learn – that is the solution, not running away from equities.
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