How to Prevent Investing Mistakes for a Robust Investment Portfolio

For instance, due the impact of COVID-19 pandemic, the previous year has been a dramatic rollercoaster ride with high market volatility for many investors. Amidst the market crash in March 2020, many investors became impatient and liquidated their portfolios. Later in the year, the markets bounced back and recovered from the losses by hitting all-time highs. This scenario rewarded the investors who had the fortitude to hold on to their assets, take a leap of faith, and not follow the herd. Here, investors who panicked lost the opportunity due to lack of awareness, financial literacy, and informed decision-making.

Notably, investing requires dedicated time, persistent effort, and patience. However, I have seen that first-time investors are too eager to jump right into the investment game. They do not commit to learn from the mistakes of others and end up repeating them. In fact, learning from your mistakes when your investment capital is modest is preferable rather than later when you have a large corpus.

As an investor, it's important to be careful and avoid any dubious decisions that could affect your investment journey and potential returns. Fortunately, most of these common investing mistakes can be prevented by simply being aware of them.

Let us look at the common investing mistakes to avoid while constructing a robust investment portfolio. It will assist you to make the right investments in your wealth creation journey:

1. Lack of investment goals

One of the most common mistake investors make, especially beginners, is lack of planning towards S.M.A.R.T financial goals. Such goals are different for every individual, for instance, children education, retirement planning, international vacation, buying a house and car, etc.

Investors are inclined to focus on the latest investment trends, best performing asset classes, or on maximizing short-term investment returns. However, you must aim to construct an investment portfolio that has a high probability of achieving your long-term investment objectives. The essential part is to plan your financial goals and align your portfolio investments with them. These goal-oriented investments will lead to having a target to achieve. It will help you to avoid the downside of being a reckless investor.

2. Inadequate asset allocation

According to the historical data, proper asset allocation is the cornerstone of successful investing. However, investors make the mistake of focusing only on selecting the top performing funds or investing only in a particular asset class. It is for this reason that asset allocation becomes a crucial part of investment planning.

The strategic asset allocation will help you allocate your hard-earned money into various asset classes with the potential to earn optimal returns and mitigate the risk by diversification.

An effective asset allocation strategy is based on the synergy of factors such as your risk tolerance, investment horizon, and financial goals. As each asset class has different levels of risk and return, strategic asset allocation will divide your investments into categories such as equity, debt, gold, cash, real estate, and derivatives.

3. Putting all your eggs in one basket

Diversification is one of the foundations of an effective investment plan. It lays emphasis on risk management and offers value to the portfolio when assets have different risk profiles and/or have low correlation with each other.

Investors often think they can maximize returns by taking a large investment exposure in a certain asset class, a particular security or sector. This is a mistake. By putting all your eggs in one basket, you position your hard-earned money at extreme risk.

You see, depending on the current market environment, exposure to a specific sector or fund might seem doing well for now, but diversification reduces the risk in the long run. When the market moves against such a concentrated position or the sector goes out of favour, it could negatively affect your entire portfolio, and therefore, your financial future.

Diversification helps if one of your investments underperforms, it will not affect your entire portfolio. For instance, if the equity market underperforms, but the bond market performs well, a part of your investments will still move in a positive direction.

You need to find a balance and create a well-diversified portfolio that has the potential to provide appropriate levels of risk and return in various market cycles.

4. Attempting to time the market

Another common mistake investors make is they try to time the market. Many investors try to predict when to invest to maximise profits and limit losses, depending on the market conditions. But guess what? Even the seasoned investors fail to precisely predict this and end up taking a huge amount of risk with the hard-earned money.

Financial markets have ups and downs based on various macro and micro economic factors. As an investor, it is important to understand that timing the market is not only a challenging task but also irrelevant. When the markets start losing momentum or turn hostile, some investors make the mistake of liquidating their investments to cut losses. Unfortunately, this will lead to making the losses a reality and you miss out on better opportunities in the future. Moreover, some smart investors will buy the undervalued stocks when the market is at a low, so they gain better value when markets scale up.

The financial markets, of course, have some patterns and historical data that can be helpful indicators when making future investment decisions. But, that does not always signal the direction in which the market will be headed.

You could simply take advantage of your time in the market by remaining invested over the long-term. If you stick with your investments long enough, you may be able to smooth out the bumps. In fact, the longer you stay invested, the more likely you are to make positive returns, like the investors who benefited from the March market highs.

5. Behavioural biases

Behavioural biases are irrational beliefs that may unconsciously influence your investment decision-making process. There are several biases that can affect your investment decision, relying on them in a volatile market is another common investment mistake.

The biases can come from fear about the future losses or expectations of gains. The saying that "Fear and greed rule the market" is true. Investors should not let fear or greed control their decisions and avoid behavioural biases affecting the investment portfolio.

One of the most costly emotional bias you need to have a control upon is impatience. If you cannot wait to buy or sell an investment, you are probably making an emotional decision. You should not rush your investment decisions without thoroughly analysing the overall market scenario.

Many new investors in the market are prone to allowing personal bias drive their investment decisions. First-time investors have a tendency to either buy companies they know or companies they like, which is an inappropriate way of investing. The companies or investment avenues you are familiar with may not always be ideal investment options for your risk profile or your financial goals.

Investing requires skills and not decisions based on your behavioural biases. Therefore, before investing make rational decisions based on opportunities, ensure technical and fundamental analysis.

In my experience, many investors do not know when to begin investing and how the process of investment planning works, especially young investors. They make investments based on half-baked advices and suggestions from friends, relatives, family members, colleagues, etc. or on follow-the-herd mentality.

This is not the right way to build your robust investment portfolio and it usually happens due to lack of financial education. To understand the investing mistakes we have discussed in this article and to prevent any such errors in future, you must become financially literate.

Financial education assist you with financial awareness and empowers you to make informed investment decisions that will ideally prevent you from making investment mistakes. It is not only enough to avoid repeating the same mistakes. You must aim to enhance your financial knowledge and develop a robust investment portfolio to save yourself from making any more investment mistakes.

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Warm Regards,
Mitali Dhoke
Jr. Research Analyst

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