Top Investment Portfolio Mistakes
If you are a beginner investor, this article, top investment portfolio mistakes, specifically written for you. If you are an experienced investor, ensure you are not committing any of the below mentioned mistakes with your portfolio!
Asset class selection
Choosing an asset class by considering just it’s recent performances rather than average returns for last three to five years.
Example 1, investing in gold by considering it’s current performance.
Example 2, when a sector is booming i.e. IT or realty, investors start investing on those companies without considering historical performances and returns! This will lead to failure!
Invest to sectors have good performance and earning history. Avoid fast booming sectors and industries until confirmed the potential to invest for long time. Do not run behind new IPOs. Flooding of new IPOs considers as the warning signal for forthcoming bear phase!
Ensure companies and sectors has long history of generating earnings, solid business and financial fundamentals, suitable to invest for long time.
Improper portfolio allocation
A good portfolio can be created by adding great stocks and high performing mutual funds or other asset classes mixing in a right proportion. Portfolio should not give weightage to any industry, business or sector unless any specific goal/s that required to do so.
Good investment portfolio to be monitored properly to ensure the performance is intact and as expected. Monitoring helps to identify the under performers and balance the portfolio in a great way!
Investment portfolios without any goals
Creation of an investment portfolio without clearly defined goals, impact negatively! Adding few stocks can be done by anyone. When investing in a stock or fund, the investor must know the reason of that investments.
Investors must define the investment goals in advance to create a perfect investment portfolio to meet that goal. This will help to find and add best products proportionally.
Investors should have short time, mid time and long time goals and associate each portfolio to that goals.
Ignoring associated risks
Imagine, what will happen if a portfolio has only small caps or penny stocks in it? Certainly, it would fail for long run because, these are risky investments by it’s nature.
When creating investment portfolio, take care on risks associated with each products adding to it. This would help investors to diversify portfolio to meet such risks.
For example, a portfolio created to meet short term goals must have law risk products such as Government Bonds, Fixed Deposits, Liquid Mutual Funds instead of high risky stocks.
Other way, mid time and long time portfolios must have high performing asset classes such as stocks and equity related mutual funds etc.
Ignoring portfolio rule of thumb
Portfolio rule of thumb is, young investors must make high risk and reward investments, such as stocks and equity mutual funds and other instruments, to their portfolio.
Middle aged investors should have best proportion of equity and debt investments to reduce risks.
Investors near to retirement, must have safe investments such as fixed deposits, liquid funds etc. for protecting the capital!
Over diversification
Goals based investment strategy help investors to add right products to the portfolio in a right proportion!
Over diversification is a common mistake among novice and even experienced investors. Initially, they would add all available products to the portfolio without considering the real purpose! It would later comes as a burden for the investors to monitor and balance portfolio!
Portfolio creation must be done through proper homework and with patience. Creation of portfolio is not one day or one month activity. It may take years to build a great portfolio by adding the right products proportionally.
Warren Buffet said, “if you don’t know what you are doing, then over diversification is good”. Selection of right assets happens when the investor is fully aware about the portfolio goal.
Frequent churning of portfolio
It is, no doubt, a common activity among beginner investors. This is the result of investments made without proper plan and goal. When such investments move to red, investors become panic and sell the stocks in loss. They will then add another stock, generally in a high price, to make another loss.
Buying high and selling low is against the investment rule of thumb!
Conclusion:
Deciding to invest required lots of preparation and homework. Investor should have definite goal to justify the portfolio and products added to it.
A best way to control the loss is to have necessary knowledge before start investing. Whether it is stock, mutual fund, debt instruments or even fixed deposits and bonds, investors must aware the risk and returns associated with that. Well planned investments have minimum chance of failure.