Do you know your investments’ worst enemy?

Do you know your investments’ worst enemy?


If you are a fan of product approach and believe in reacting to each micro development, there is a high possibility that your investments may not reward you in long term.



With five life insurance policies, investments in 10 mutual funds, a couple of stocks and fixed deposits, Mr. Mehta thought he had hit all the right notes in managing his personal finances. Until, he met a professional financial advisor! While all his investments were done through agents and brokers, Mr. Mehta, a ‘Do it Yourself’ (DIY) guy, had personally taken all the investment decisions. After going through Mr.Mehta’s portfolio, the financial advisor discovered that there were a lot of things that needed to be undone first.

Despite having five insurance policies, Mr.Mehta was woefully underinsured. He also later revealed about another insurance policy, which was taken in his son’s name. After having a closer look at his mutual fund portfolio, the financial advisor discovered that around 70 per cent of the holdings were concentrated in mid & small cap funds and thematic funds. This was a high risk portfolio. His direct equity portfolio also revealed a similar story. Just one stock had about 40 per cent allocation in the total stock portfolio. There were many penny stocks too which were bought as trading tips and were a drag on his portfolio. He could not accept the fact (even to himself) that he had made a mistake in buying such duds and hence did not sell to cut losses.

When questioned about health insurance, Mr.Mehta confused it with one of his endowment policies. Later, it became clear that he was covered by his employer but did not have his independent health insurance cover.

Mr.Mehta’s investments were done in a haphazard manner. Some sporadically on broker tips, some with the objective of saving tax. Then of course there was this whole maze of financial information available on TV channels, newspapers, etc to take independent decisions.

Mr. Mehta is not alone. You will find many such DIYers who think they have the requisite financial know-how to take investment decisions. However, there are some serious pitfalls of DIY investing. Let us examine some common investing perils because of which DIYers become their own worst enemies:

•Product-oriented approach: DIYers lay more emphasis on choosing the right product. They will research endlessly on the internet, consult their agents and discuss with friends. The main focus is on product and high returns. But they miss the bigger picture in the process. The success of investment management lies in devising a strategy to align well-defined financial goals with investments. Investment planning needs to be solution-oriented. The time period of investment, how much you invest and the purpose of investment is as crucial as choosing a product.

•Fail to understand asset allocation – DIYers typically would think about taking any action in equity markets when they hear something too good or too bad in the media. They tend to time the market and end up buying at peaks and selling at lows. They focus a lot on the micro events like any stock news or political developments rather than macro economic situation in the long run.
As they fail to view their portfolio in totality, they do not understand the concept of asset allocation in its true sense. Their portfolio is not diversified enough so as to have the right asset mix – be it debt, equity, real estate, gold, etc which would suit their financial situation and risk profile.

•Irregular monitoring: While DIYers do a lot of homework in researching a product, they fail to monitor their investments on a regular basis. They will periodically look at their investments when they react to market events in a knee-jerk manner. As a result, they fail to book profits or cut their losses at the appropriate time. Ongoing monitoring is as essential as choosing a product.

•No preparedness for extreme situations: Since DIYers view their investments on a piecemeal basis, they fail to prepare for financial emergencies like hospitalization, loss of job, etc. They have a common tendency to mix insurance with investments and hence stay grossly underinsured. They are so confused with multiple options that they cannot differentiate between a life insurance policy and health insurance cover. In the absence of a holistic financial approach, they are forced to sell their investments in distress to arrange funds for emergencies.

Conclusion: We rely on specialists all the time in our daily lives - a doctor to take care of our health, an electrician to fix wiring, a teacher to monitor our children’s education, etc. But the mindset to pay for professional fees to a financial advisor has still not fully developed in India. One may think that when there is already so much free information available on TV channels, newspapers, financial blogs, why should I pay for it? But the fact is too much reliance on freely available info actually proves to be a costly affair in the long run.

If you are a DIYer, stick to a few basic principles in managing your finances. You need not study or learn any financial jargons for that. Buy a term insurance cover, buy adequate health insurance, create an emergency fund, define your financial goals, follow an asset allocation strategy and diversify your portfolio, align your investments with goals and monitor your portfolio regularly.

If you have the time and willingness to do this and do it right, then you can afford to be a DIYer. Otherwise, you are better off consulting a financial advisor. Find the right advisor, state your expectations, collaborate with him and let him do his job. The money you spend on professional fees for financial advice would be worth it. Remember, there are no free lunches in this world!




Happy Investing
Source:Moneycontrol.com