Have you recently met any of your relatives or close friends who had a new birth in their household? There are decent chances that you were asked to suggest a good name for the child! The chances are even higher that the parents had already decided on a name for the child and your suggestions were not considered at all. Nonetheless, the parents and grandparents rhetorically toss this “Naam Batao” (Suggest a good name) inquisition at everyone visiting their home to bless the child.
Something similar is the situation with the household investors. They tend to show their investment portfolios to everyone remotely connected with the financial world and seek suggestions for restructuring/rebalancing. The problem most of the time is that they have no intention to follow the suggestions. Usually, they are just seeking validation for their investing actions or boasting about their investing acumen.
I understood this Naam Batao game a long time ago and stopped taking the bait. However, as a basic courtesy towards friends and relatives, many times one has to just glance through their portfolios (or suggest a name), without offering any suggestions. Over the years, I have observed that most household investors’ portfolios could be divided into three categories.
1. Well structure portfolios like a gourmet cake
Prudent investors, who have clearly defined their investment plans, and formed a good investment team comprising investment advisors, fund managers, etc., usually have a well-structured and balanced portfolio. These portfolios mostly adhere to the defined investment plan and usually yield the desired results. These portfolios are invariably reviewed and rebalanced periodically with the help of the designated investment team. These investors form a small minority of about 80 million household investors in India.
2. Unstructured portfolios that have grown like ginger
A large majority of household investors’ portfolios are unstructured and have grown in a casual, unplanned manner over a while, like ginger. One could find small quantities of numerous stocks allotted in IPOs over the years. There would be stocks bought on rumors (tips) which are now trading at a fraction of the purchase price. There may be a few stocks that have compounded at a decent rate over the years since these investors tend to sell the winner early. There are usually multiple insurance policies (each with a small sum insured), numerous mutual funds with overlapping portfolios, and fixed deposits of small amounts in multiple banks. These investors tend to save on small advisory fees; while losing big on missed opportunities.
3. Mix of structured portfolios with some entertainment quantities of momentum stocks, like fries on the side
There are many investors, who mostly follow a well-structured investment plan, like the ones in the first category, but keep a small portion of their financial investment portfolio to trade momentum in the market. Usually, it does not add (or take away) any meaningful value to their overall portfolios. However, I have seen some cases where the investors broke the discipline and crossed red lines swaying with the momentum. Taking significant leverage, larger positions in poor quality stocks, or taking large short positions in overconfidence are some of the expensive mistakes these investors are often seen to be committing.
Which category do you fall in; find yourself.
No comments:
Post a Comment