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Last Updated : Mar 27, 2020 09:42 AM IST | Source: Moneycontrol.com

The mistakes do-it-yourself investors make when the going gets tough

Even when they take a lot of effort to choose the right asset class and products, they let it languish once the investment is done

Prathiba Girish

The last few days have been unprecedented and will be part of stories which we tell our grandchildren!  One can almost imagine the narrative of an unheard-of virus catching the whole world unawares and unprepared, with a total lock down and absolute chaos in the financial markets and how we all survived to tell our tale.

We have been proactively in touch with many of our customers over the last few days, to understand their worries and allay their fears. We are pleasantly surprised though by the typical response to the situation. Some have said “I am not worried as the money has been invested for the long term and things will stabilize.” Others have even said “Is this a good time to invest more?” Even customers who are seeing their first big downturn are holding up well.

Close

On the other hand, we get a lot of calls from DIY (do-it-yourself) customers who want a sounding board during difficult times. They are looking for some advice; they are essentially gauging if they are on the right track.  What we notice with a vast majority of them are the following.

They believe they have the knowledge and bandwidth

DIY customers believe that investing is easy, and that they would save a bit by not paying a professional. What they miss most of the time is that investment is not a one-time process and requires constant monitoring.

Most of them have successful thriving careers, which come with their own set of challenges of being highly demanding and stressful. Even when they take a lot of effort to choose the right asset class and products within the same, they let it languish once the investment is done, believing that over time, they would be handsomely rewarded for their choice.

During our interactions in corporate sessions, we have come across people holding on to debt mutual funds where the underlying is very weak, and the choice was based on past returns in such schemes. They were unaware of credit risks. Many of them are ignorant about some of the lost returns due to these risks. When this is pointed out, it leaves them disheartened.  You need to be realistic in terms of time and effort needed to manage your investments in DIY mode.

They are perpetually testing waters        

Assuming that DIY investors have done their research and are fairly confident of the long-term prospects, they still lack the conviction to go all out. For example, they may have decided that they will put Rs 60 out of Rs 100 in equity; I.e., DIY investors have a clear idea on asset allocation. But, despite spending considerable time and effort in shortlisting the right product, they do not have the confidence to invest the entire Rs 60. They will invest Rs 10 and if they are proven right in a few months, they would deploy Rs 10 more. They do not have enough conviction to take the plunge, without waiting for too long.

When things worsen, they freeze

In volatile situations such as the one we are faced with now, they are unsure if they need to hold on or cut their losses. They don’t have the luxury of someone having their back. They now doubt if their asset/fund selection was the problem in the first place. When the rubber hits the road, they do not have people to handhold them.

Focused on the returns, without understanding risks

We are getting several calls from people wanting to invest directly in equity. The general thinking is, it will go up in value faster than mutual funds do. What is more worrisome is that they are confident of stocks going up sharply and soon. While that is a possibility, one must also consider a scenario where the recovery is slow and stocks languish for longer then you expected them to. In such a situation, the volatility of such a portfolio can also be much higher.

We have also had calls where people are looking at investing in stocks with a time horizon of six months. This is something that is definitely not a good idea, as not only do you have to get the stock selection right, you will also have to bet heavily on a quick recovery.

Currently, when you have the time. Use it to evaluate how you stack up on all these counts. If you think you do not have the bandwidth to stay the course, take professional advice for a brief period and see how much value it is able to add to you. If you don’t find it valuable, you can always switch to the DIY mode.

This could be a good time to do the dreaded task of taking stock of your finances as well as looking for a professional who will fit your bill. The best way to do the latter is by checking what his/her current customers have to say about him/her.

(The writer is a Certified Financial Planner and Founder of Finwise Personal Finance Solutions)
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First Published on Mar 27, 2020 09:42 am
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