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Author Topic: Few mistakes to avoid - investing  (Read 330 times)

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Offline jigarmech

Few mistakes to avoid - investing
« on: January 07, 2018, 09:51:05 PM »
Reacting to short-term returns
Towards the end of the year or start of the next one, investors tend to sell the fund with the worst 1-year returns and buy the one with the best returns. It makes them feel better, and they will tell you that the new fund is ahead of the curve and run by a smart manager and the old one has lost its touch. What they won't say is that they are buying high and selling low. Nor will they say that short-term returns are just noise. You are better off buying funds with lagging short-term performance than those with top-quartile returns.
« Last Edit: January 07, 2018, 10:07:31 PM by jigarmech »
"A neutron walks into a bar and asks how much for a drink, the barman replies for you NO CHARGE"

Offline jigarmech

Re: Few mistakes to avoid before investing
« Reply #1 on: January 07, 2018, 09:54:44 PM »
Basing sell decision on cost basis
 You bought fund A at Rs 10 and now its NAV is Rs 5. You bought fund B at Rs 10 and now it’s Rs 20. Which should you hold, and which should you sell? I have no idea. What matters is which will have better returns over your investment horizon. If the answer is fund B, then sell fund A and put the proceeds in fund B. The problem is that people have an emotional attachment to the price. Some are afraid to book losses, and others are too anxious to sell a winner for fear that they'll miss out on gains. What matters is whether the funds have strong fundamentals.
"A neutron walks into a bar and asks how much for a drink, the barman replies for you NO CHARGE"

Offline jigarmech

Re: Few mistakes to avoid before investing
« Reply #2 on: January 07, 2018, 09:55:57 PM »
Selling after the market falls
The short-term direction of the stock market is unpredictable; yet selling in reaction to market moves implies that you can predict short-term moves. The markets are not perfectly efficient from minute to minute, but they quickly reflect a best guess based on new information. Fear is one of the greatest enemies of successful investing. When you're worried about your money, you want to make it safe. However, you risk missing out on the next rally, and you might not even keep pace with inflation. From a long-term perspective, cash is very risky and stocks are low risk. Put another way, this is another example of selling low and buying high. Savvy investors go bargain hunting when the market is oversold; you should, too.
"A neutron walks into a bar and asks how much for a drink, the barman replies for you NO CHARGE"

Offline jigarmech

Re: Few mistakes to avoid before investing
« Reply #3 on: January 07, 2018, 09:56:43 PM »
Accumulating too many niche funds.
In 2007, infrastructure funds were the rage and the timing turned out to be terrible. These specialist funds are exciting and fun to buy, but they will mess up your portfolio if you let them. Yet you can get the same exposure to sectors through more diversified funds. Niche add extra volatility and make managing your portfolio more difficult.
"A neutron walks into a bar and asks how much for a drink, the barman replies for you NO CHARGE"

Offline jigarmech

Re: Few mistakes to avoid before investing
« Reply #4 on: January 07, 2018, 09:58:23 PM »
Failing to build an overall plan
This is a biggie. Spend a little time to spell out your goals, how you'll meet them, and the role of each investment. This is an enormous help in figuring out how to get to your goals and how to adapt along the way. Make a plan, and your day-to-day investment decisions will become easier and less stressful. Once you've got your plan, spell out why you own each investment and what would lead you to sell. For example, you could say that you own a focused equity fund as a long-term 20-year investment for its manager and its strategy. You'd sell if the manager left or asset bloat forced a change in strategy. If you have doubts about the fund in the future, you can turn to that document when you may well have forgotten what the draw was in the first place.
"A neutron walks into a bar and asks how much for a drink, the barman replies for you NO CHARGE"

Offline jigarmech

Re: Few mistakes to avoid before investing
« Reply #5 on: January 07, 2018, 10:03:11 PM »
Making things needlessly complex
The financial industry works overtime to sell the message that investing is complicated, messy stuff that you couldn't possibly undertake on your own. Is it any wonder that so many investors are paralyzed with fear and indecision? Actually, buying and holding a portfolio composed of plain-vanilla funds --with perhaps a dash of a "diversifier" such as a sector fund --is more than adequate to help us reach our goals. That's also the kind of portfolio that you can easily manage yourself. By building a sturdy, streamlined portfolio, you'll have fewer moving parts to monitor.
"A neutron walks into a bar and asks how much for a drink, the barman replies for you NO CHARGE"

Offline jigarmech

Re: Few mistakes to avoid before investing
« Reply #6 on: January 07, 2018, 10:04:02 PM »
Not understanding the risks
Narrowly focusing on recent returns can blind investors to risks. If a fund has a long track record, you can easily get a handle on risk by looking at annual returns. In a bad year, the stock market can lose 30% or more. In a bad 3-year period, it can lose 60%. It's reasonable to assume that nearly any stock fund can do at least that badly. This is why stocks are for 10- or 20-year time horizons or longer. If you know that going in, you stand a much better chance of earning a healthy return. 
"A neutron walks into a bar and asks how much for a drink, the barman replies for you NO CHARGE"

Offline jigarmech

Re: Few mistakes to avoid before investing
« Reply #7 on: January 07, 2018, 10:04:42 PM »
Not diversifying properly
The 2008 bear market punished financials the most, while energy fared best. In some markets, growth stocks get crushed, in others mid and small caps. Every down period is different, so be sure to diversify between market caps, equity and debt, and maybe even some amount of foreign exposure.
"A neutron walks into a bar and asks how much for a drink, the barman replies for you NO CHARGE"

Offline jigarmech

Re: Few mistakes to avoid before investing
« Reply #8 on: January 07, 2018, 10:05:32 PM »
Not saving enough
Start early - in your 20s or 30s. And never stop. If you are diligent and consistent, reaching your goals will be quite manageable. If you don't, you better make a killing later on.
"A neutron walks into a bar and asks how much for a drink, the barman replies for you NO CHARGE"

Offline jigarmech

Re: Few mistakes to avoid before investing
« Reply #9 on: January 07, 2018, 10:06:07 PM »
Failing to rebalance
When the markets really move, your portfolio can go off-kilter and mess up your nicely laid plan. Rebalance yearly so that you'll be buying low and selling high.
"A neutron walks into a bar and asks how much for a drink, the barman replies for you NO CHARGE"

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