When we begin our investing journey, we tend to think that whatever decisions we have made about investing and compounding, etc., will go well. Unfortunately, that is never the case. We make a lot of mistakes. The problem doesn’t lie in the fact that we make mistakes. The problem lies in the fact that we ignore or even worse- justify our mistakes. This results in our portfolio growing, but not growing the way it should, which further results in factors that drag down our portfolio.
Hence, it is imperative to understand some of the very basic yet important mistakes that drag down our portfolio.
Not giving importance to Asset Allocation
As a person working in the field of finance, I have worked with so many clients who invest in assets not even knowing the type of asset they belong to. They will also be fooled by their advisors by terming debt as equity or equity as debt. There are mainly 4 asset classes in India that have gone through the test of time – Equity, Debt, Real Estate, and Commodities ( Gold, Silver, etc). There are other asset classes also like crypto and NFT, but they haven’t been able to stand the test of time. Each of these 4 asset classes has its traits. You cannot expect to keep money in Fixed Deposits which is a Debt asset, and expect to have a 14% compounding. Similarly, you cannot expect Equity as an asset class to not be volatile. Look into all your investments, chart them down on a piece of paper or Excel sheet, and categorize them as per their asset classes. If your investments aren’t into equity by more than 70%, you cannot beat inflation and certainly cannot see the compounding that you wish to see.
Not understanding market cap split
What is a market cap? In simple terms, how much portion of the free float market is a particular stock covering is called the market cap. Therefore, you might buy the stock Suzlon today thinking it is giving great returns and is a multi-bagger and all that stuff, but you don’t even know its market capitalization. It is important to know the market cap of any stock as SEBI distinguishes them as large-cap, mid-cap and small-cap as per their market cap. hence, you would know that stock A which is large-cap stock is less volatile than stock Z which is a small-cap stock. If you have a stock portfolio or a mutual fund portfolio, it is important to see what is the market cap split of your portfolio. Why? Because your portfolio will behave the way its market cap split allows it to behave. If your portfolio is generating huge profits but at the same time falling big time when the market falls. Maybe your portfolio’s market cap split is 70% small-cap, 10% mid-cap, and 20% large-cap. See for yourself.
Over cluttering with products
As an investor, it becomes very difficult to not waste our time and money investing in 10 products that work the same way. And this doesn’t happen in one go. It happens over some time. Today you might belong to the middle class strata of the society earning 40-50 thousand and investing 5-10 thousand in mutual funds. tomorrow you might earn 1 lac a month and think I should probably try a PMS whose investible corpus is 50 lacs to 1 crore! However you fail to realize that having too many products in your portfolio will drag down the performance of your portfolio. Why? because when the time comes to monitor them, it will be an extremely difficult job to monitor your investments, realign or rebalance, and do profit booking or loss booking. Therefore, I follow the principle of investing only with mutual funds of not more than 5 funds. It helps!
Buying and not Investing
Most investors would put their money in the market not to invest but to buy – buy a stock, buy mutual funds, buy PMS, buy AIF, buy real estate, etc. Your portfolio will never grow if you do not invest. the fruit of investing is compounding and the fruit of compounding can be seen over 15-25 years of time.
No willingness to learn
An investor learns every day. Because an investor doesn’t think about when to take out their money and watch his/her portfolio every day when the market corrects by 1% or 15%. Hence an investor can devote time to studying various topics and subjects. Google all the great investors of India or outside India, and you will find one thing in common- all of them had a willingness to learn. When you learn and have knowledge in your belly, you refrain from showing off and focus on building an empire.
These are some of the mistakes according to me which drag down our portfolios and prevent them from growing the way they should.
