In my last column, we had initiated a discussion on common mistakes market participants make while investing in the equity market, be it through shares or mutual funds. Some mistakes we listed were those abetted by sleazy market manipulators with the ability to stay out of the clutches of the regulator. But then, there is no shortage of self-induced mistakes committed by market participants either. For starters, half-baked knowledge based on some random reading is potentially a weapon of wealth destruction in the market.
To cite an example of such half-baked knowledge, I still recall with bemusement, having met a market participant who flew down from Bengaluru some years ago, to meet me with a portfolio holdings sheet comprising around 350 stocks and mutual funds. He informed me that he followed some ‘beverage investing’ style that he had read about and imbibed, to help ‘diversify’ his portfolio. He also informed me that his wife, also an IT professional and avid market buff like him, had a portfolio of around 250 stocks and mutual funds.
And while on the point of mutual funds and stocks, there is no dearth of market participants that swear they buy only blue-chip stocks and mutual funds. By ‘blue-chip’ they presumably mean large cap stocks and funds as per the regulator’s categorization norms. Clearly then, they are duplicating what the fund manager of the mutual fund scheme who has the wherewithal to do it far better, does. This act of duplication, thus defeats the very purpose of ‘diversifying’.
Another, and more fundamental but self-induced mistake market participants make is to forget all about one’s Asset Allocation plan and the need to undertake re-balancing when the markets swing to either extreme. Resultantly, many investors panic and simply bail out of their SIPs as well as in certain extreme cases, all their equity investments when the market shows signs of weakness.
At the worst possible time, mind you. And then, when equities rebound sharply, many are averse to the logical act of re-balancing by moving a notch or two lower on the risk ladder even while continuing to ride the tide. There can be no prizes for guessing how this ‘merry-go-round’ ride will eventually play out for such market participants.
Finally, there is a belief that losing money through such self-induced mistakes is largely the domain of retail market participants. Think again. There is no dearth of exotic ‘weapons of mass (wealth) destruction’ always on offer for market participants with the tag of High Net Worth Investors (HNIs), and there is no shortage of those ready to take the bait sans awareness, and bite the inevitable bullet.
The only real difference between these so called HNIs and retail participants is that the former are usually averse to complaining and letting the world at large know how they have allowed themselves to be relieved of their funds.
(Views expressed here are personal)