If you ever find an investor or advisor who claims to know a lot about money but says they never got their hands burned while investing, turn around and run the other way. “Or call me, for such unicorns are the stuff of myths and investment mistakes are inevitable,” says Asheesh Chanda, founder and CEO of wealth management firm Kristal AI.
I’ve been an investor for over two decades. In my role as a financial advisor, and as a startup founder, I have learnt more from my mistakes than from my successes. For when you are succeeding at the game, it is human tendency to believe one knows it all. It’s only when the best laid plans go awry that one looks deeply at the game plan, and the loopholes thereof.
So, let me tell you through a journey of the investment mistakes I made and learnt from them over the years. A page from my handbook, could help you make better investing choices. But the And the golden rule of all – don’t wait for the ‘right’ moment to start saving or investing. The best time to invest was yesterday, as they say, but if you couldn’t make it you can start as soon as you finish reading this piece.
1. Pushing off investing till the last moment
When you are in your 20s, one feels there is always ‘another day’. Like every other 20-year-old, I was more interested in living it up than ‘saving’. Investments — the very word would leave a dry taste in my mouth and make me feel older. It’s only later, in my mid-20s that I realised the opportunity cost of this delay. I was married by then; my family was growing. Life was happening, and I suddenly felt so unprepared for it. It dawned on me that while pushing off my investments for ‘another day’, I had neglected to shore up for the today that was already happening.
I live in Singapore and I see students and teenagers make good use of their internship money and and also buy ETFs (Exchange Traded Funds). I often advise the youngsters working at Kristal to do the same. With asset types like ETFs and digital platforms, it has become uber-easy for anyone with some extra cash in hand to become a part of the market’s bull run. Investing early makes you smart. Not old.
2. Not customising my portfolio
When we created Kristal, the brains behind the company realised that 70-30 model can bring pitfalls too. So we customize very single portfolio. This is a basic portfolio building method where 70% of one’s investments is in stocks and the rest in bonds. I had followed the same 70-30 model, and while I believe it is good for beginners, your plan cannot stay stagnant. As your needs and lifestyle changes, it is imperative to keep tweaking your portfolio so that it does not stay stagnant.
Let’s say you wanted to take a break from your regular work and yet have enough income from your investments to be able to meet your household needs. A regular portfolio might not be able to give you that so instead, you would need a multitude of portfolios customised for specific needs. Or you can look at it as creating a portfolio for your short-term goals, which has a higher risk factor, and which you can trade frequently. Someone else may require a retirement portfolio or building capital for kids. You can even have mix of portfolios with a mix of asset classes. It’s important to understand your needs and customise your portfolio accordingly, instead of just following a model talked about in the news.
3. Not being patient enough
Many investors, myself included before wisdom found me, look at investment horizons with fear and apprehension. If only I had a dollar for all the times someone has asked me if staying invested for 10 years was necessary, and couldn’t we do something to hasten the returns. This is why investing early becomes crucial (see point 1).
Moreover, keeping your expectations real also helps. Investments are pure math, but the markets aren’t always in linear progression. Bull runs are followed by periods of bearish activity. Volatility is always a constant in every investing scenario. In either case, all that is asked of you as an investor is to stay patient and not take inadvertent risks in order to ‘increase’ or ‘hasten’ your returns. If you’re worried about missing out, a second portfolio for short-term investments can be used to trade frequently.
4. Allowing sentiments to get the better of sanity
There’s a well-loved adage that goes ‘Life happens to you when you are busy making other plans’. This is as true of investing as of everything else. Just earlier this year, we saw the markets dip post a decade-long bull run. And then, they came back up even when trade pundits everywhere were clamouring about how this was the death of the bull.
Sentiment dictates that you should withdraw all your investments and run for safety the moment the markets hit a roadblock. Logic tells you that it is better to keep your money parked in safe assets and let your returns compound. Bear markets very often provide opportunities for investors to reap high returns, but these often come with a high risk. Hence, while it is important to keep some liquid cash in hand, it is even more prudent to keep your long-term investments safe and untouched.
If you look at history, you will see that the market works in cycles. There are periods of bearish tendencies, followed by a strong upswing. Once every 10-15 years, we enter periods of recession. The bottomline: There is a cycle that one needs to weather through. Upswings are not hard to invest in, but it is even more important to stay invested during periods of drought like the one we are facing right now, and not get overwhelmed by sentiment. When the cycle ends, you will be better off having stayed the course rather than deviated from it.
5. Giving in to temptation aka the problem of plenty
Earlier in this piece, I talked about how blindly following an age-old method of investing might not be enough. The corollary to that is the problem of plenty. When one has so many asset classes to choose from, and so many models to follow, it is easy to get distracted. That’s when the investor’s old foe – Mr. FOMO – rears his head again.
Diversification is an important aspect of creating a portfolio. The right mix of fixed income assets, gold, and equities is necessary for stability and for protecting against risk. But then there are alternatives like cryptocurrencies, sustainable investing strategies for those who would like to give back to society, and strategies for emerging markets. It can get difficult to choose.
I have been at that stage in the past where I have given in to the temptation and decided to invest in strategies I didn’t even need because someone else was doing so, and I didn’t want to be the one who missed out. Now, I understand and preach the value of patience and caution. Spreading yourself too thin exposes you to unnecessary risk. Instead, go slow and steady and increase your exposure as your risk capacity increases. Hedge your bets, and ask an advisor to help you diversify with ample downside protection.
This isn’t all, however
There are many other mistakes which new investors make which I would like to caution you against as well. Things like wanting to ‘time the market’, or buying assets that you like without knowing where they fit into your portfolio are flaws every investor should guard against. Plan backwards so that you start investing knowing where you want to reach in the next 10 years. Never ever mix insurance with investments. Build your emergency funds, move away from traditional choices like gold and real estate and diversify with global markets.
Most importantly – rebalance your portfolio regularly. Ask an advisor for help if you need it, and be disciplined about maintaining a healthy portfolio the same way you are about other important things in life.
And the golden rule of all – don’t wait for the ‘right’ moment to start saving or investing. The best time to invest was yesterday, as they say, but if you couldn’t make it you can start as soon as you finish reading this.
All images: Courtesy Getty