Ten mistakes to avoid while creating a rewarding investment portfolio
Inventing isn’t an exact science, and the process can be riddled with difficult decisions and endless risks. However, if you look and listen carefully, there is a set of unwritten rules & tips that already exist to help guide people through their investment journey.
Here are 10 mistakes to avoid while aiming to create a continuously rewarding financial portfolio.
1. Corporate governance: A sound corporate governance structure is the hallmark of a good company that is capable of delivering long-term corporate success and growth for all its stakeholders. Before investing, a person must have a look at the company’s track record, past performance and steer clear of promoters, who may have histories of fraudulent financial transactions. Investing in securities that don’t have a good financial track record is a risky move and must be avoided at all costs.
2. Stop-loss rule: This is one of the most important points in the investing rulebook. The stop-loss rule exists to protect investors from ballooning losses. It’s a self-imposed limit that an individual decides upon before investing; a sort of threshold beyond which, losses from an investment cannot and should be sustained. Any sensible investor should exit after having sustained continuous and serious losses, and there is no shame in doing so. There is nothing wrong with accepting that investment has failed. Moving on from a bad investment is better than nursing your pride and hoping for an unrealistic turn of events.
3. Do not invest for short-term gains: Creating a rewarding investment portfolio can never be a short-term or a quick process. Profitable investing is synonymous with long-term periods and making a quick buck overnight should never be the goal.
4. Invest to the extent of your capital: This is another invaluable tip that should be adhered to. It might be tempting to often borrow beyond one’s capacity and invest in hopes of heavy returns on investments. However, this is a dangerous path to embark on because investing beyond one’s capacity by leveraging and borrowing heavily can often lead to financial doom in the investing world. Hence, when it comes to creating a rewarding portfolio, avoid instruments like stock futures except for hedging and do not get into any directional positions.
5. Invest in quality stock: Every investor must conduct their due diligence and research before investing. The quality of a stock can be judged by its past financial history, track record, corporate governance structures, etc. Investors can also gauge quality by asking simple questions such as, is the company capable of withstanding a crisis like this current pandemic, and will it be able to generate enough cash flow to sustain a major calamity.
6. Product performance/acceptance: Assessing a company’s performance by the way its product is accepted in the market is crucial to make an investment decision. It is important to understand if a particular company is making a product or providing services that are positively covered through surveys as well as media coverage but most importantly, if or not it possesses happy customers. It is also crucial to assess a company’s potential to perform better and grow its market share. Assessing a company’s overall market standing & growth trajectory can be vital indicators of its future and answers to such questions can help investors opt for evergreen companies that are most likely to reap profits in the future.
7. Do not fall prey to rumours: Self-proclaimed financial gurus are a dime a dozen, and it is very easy for a financial novice to fall prey to false news. It is best to steer clear of herd mentality while trying to build a long-term portfolio because most of the news in the financial rumour mill stems from knee-jerk market reactions.
8. Evaluate risk appetite: Assessing risk is a discipline in investing and following it has long-term benefits. Assessing how much risk one is exposed to or can undertake while investing is extremely important to know, which can eventually help in making financially sound decisions.
9. Review your portfolio: Investing to create long-term wealth is not a one-time game; instead, it’s a constant process that is akin to caring for a plant and seeing it grow. Reviewing one’s portfolio periodically and re-arranging investments according to market trends and global events is an extremely vital process to reap healthy profits and avoid losses.
10. Do not make hasty decisions: Long-term investing requires a cool head and a calm mind. Hastily made snap judgments that are made based on news stories or the sentiment of fear do not reap profits in the long run. A classic example of this would be the panic selling that took place early last year due to the pandemic-induced fear. A lot of people who pulled out their investment lost money due to short-sighted vision and falling prey to the news media frenzy.
(Author of the article is Milan Ganatra, CEO & Co-founder 1Silver Bullet)