The 3 investment mistakes of my life

“Have you seen the movie Kai po che?” Vijay suddenly threw this question at me. We had just finished seeing another movie and were driving back home.

“Yes, I have. It was on TV a few weeks ago.” I replied casually.

“Did you like it?” he asked.

“Yes, I did. A lot.”

“Do you know it is based on Chetan Bhagat’s book 3 mistakes of my life?” he continued.

“Oh! I didn’t know that. I haven’t read the book, in fact, none of Chetan Bhagat’s books.” I said with a tone mixed of curiosity and surprise.

“Even I haven’t read it. I got the information from one of the reviews of the movie,” said the movie buff with a twinkle in his eyes. I smiled.

There was a short pause.

I got thinking. I turned to Vijay, who was driving, and asked, “What about the 3 investment mistakes of your life?”

Vijay was slightly taken aback. “What?” It took him a couple of seconds to dwell upon the words and then said, “Interesting question!”

“So, what would you say are the 3 mistakes you made with your investments?” I prodded Vijay.

“OK. I will give it a shot. First, I guess I never paid attention to how much should I invest in what? Initially, I put almost all my money in Fixed Deposits. Then I bought a house for investment. Of course, there was my father’s friend who sold me a few insurance policies.

Second, my exposure to equity began very late. I also got hooked on to stock trading. The idea of making money I realised only after losing money that it was not my cup of tea.

Final, I put in a lot of time and effort every month to invest my savings. I didn’t realise that so many things can just be simply automated and save so much time.

I guess those are the big ones. But I am glad these mistakes are all past.”

“Yes I know, Vijay. I know that you now have a very sound method of managing your investments.

Let me tell you though that you have been very courageous to accept your mistakes. I am not sure if you would be surprised that in my practice I come across several investors who continue to make the same mistakes.

Mistake #1: They don’t pay attention to Asset Allocation.

Lots of random investments based on half-baked advice from friends, family and relatives is what they build their portfolio with. The portfolio is inadequate to cover inflation let alone beat it. So, one would find several fixed deposits, PPF, EPF, money-back and endowment insurance policies, some stocks or mutual funds. That is it.

In one case, I recently summarised the asset allocation for an investor. It was a jolt for him. He thought he was investing a decent amount of money, which is alright. But what was not right is the places that money found its way to. As usual, Fixed Deposits ruled the roost, then real estate, PPF, etc. When it comes to equity, it was just about 6% of the portfolio.

For his age, that is totally inadequate. On top of that, he is thinking of buying one more property so that he can reduce his tax outgo by a few thousand rupees. I had to tell him that his top priority has to be to increase his exposure to the equities.

An investor’s biggest weapon to create wealth with controlled volatility is asset allocation. Get that right and you will be very well on your way to financial freedom.

Mistake #2:  They count lots of activity as an investment strategy.

I would see so much similarity in what you said about stock trading. A lot of young investors who want to invest in equity get this idea that the way to make money from the stock markets is by trading. Stock markets are a roulette machine for them. You have to make your bets and you could well be the next Rakesh Jhunjhunwala. And at their service is the “stocks tips” industry that helps them punt their money.

Most of these, so called investors but actually punters, lose money. Usually that is their very first experience and it makes them averse to investing in stocks and equity. I feel so sorry for them!

Here is another example. One investor keeps buying new set of mutual funds every month. I counted – there were about 18 funds in the portfolio. This was a clear case of over-diversification. Now, a mutual fund already has a portfolio of stocks, sometimes in excess of 100.

All mutual funds mostly invest from the same universe of top 500 stocks. And you have 18 such funds! It could only mean that you have several major overlaps in the stocks in your portfolio. Even if you were trying to take benefit of various strategies or fund managers, this is not the way.

Yet another one was considering investing in a ULIP. He wanted to add a new investment to his portfolio.  Since he was had already made investments in mutual funds, he wanted to try the ULIP. Now, why would an additional product make more sense than putting money into your existing portfolio, which is doing well? It beats me! Thank God, he listened and is not going for the ULIP.

I reiterate that all good things in life have to be developed organically. One has to be a farmer and not a hunter. It is true for investments too.

If you find yourself spending a lot of time with your investments, then you are definitely doing something wrong. You need to get your investment strategy right. Read this.

Mistake #3: They don’t automate their investments.

As you also said, you spent a lot of time and effort in figuring out which investments to buy and when. Take the case of investments in mutual funds. This are real life examples I am giving.

The investors I interact with have not started systematic investment plans. One of them reasons that he is not sure about the surplus every month and hence makes the investments based on what is available.

The other one says he likes to pick his investments every month. With SIP, he will get blocked into the mutual fund schemes he has chosen ones. But by doing it every month, he gets to evaluate it afresh. So, he sees what are the schemes that have delivered the best 5-year returns and invests in them. He is the same person with 18 funds.

Mind you both these people are salaried, that is fixed income every month. My guess is that deep down both want to time the market too. That is another big disease that a lot of retail investors suffer from. Market timing is a never ending abyss. And most of the times, you will find yourself succumbing to your own biases and investing at higher market levels.

So, if you are not sure of your total surplus, pick a smaller amount and commit monthly investments for it. If you have additional surplus you can always add to your investments.

Based on 5 year returns, the fund list will change every time. And using that as the only parameter is absolutely the incorrect way. There are set of factors to select your mutual funds that you should be looking at rather than just one.

Automation is your best winning strategy. Automation brings in the discipline that you can never hope to get otherwise. Be it paying your bills, making your investments or setting reminders for your spouse’s birthday – automation will save you every time.

Make your investments recurring such as your Recurring Deposits; such as your SIPs in mutual funds.”

“The car came to a halt. We had reached my home. Vijay, you are doing a fine job now with your investments. Just let the good thing rolling.”

“Yes Vipin. Thanks again for those reminders.”

I got off the car and turned to say bye.

“Vipin, you should write the book – The 3 investment mistakes of my life. I am sure it will be useful for several investors. Probably it will break Chetan Bhagat’s records. ” Vijay sounded serious.

I let a laugh out. “Vijay, if there is one person who should write the book, given the experience, it is you.” Vijay smiled, shaking his head and put the car into gear.

“Think about it.” I said a little louder and waved bye to him.

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Between you and me: Do you identify with any of the points mentioned? I would love to read your thoughts and feedback in the comments.