Why Many Investment Portfolios Don’t Succeed

Many intelligent, well-meaning, and well-informed investors fail to meet their long-term financial objectives. What’s more; it’s not uncommon for the behaviours that led to the first failure to have to be repeated time and again, sometimes resulting in the complete capitulation of one’s risk tolerance or the proverbial ‘swearing off’ of financial assets. Here are three reasons why this happens

Racing in the wrong direction

What’s the best time to buy more of something? When prices have fallen. Unfortunately, this is also the time that most investors wouldn’t consider touching it with a barge pole. As asset prices rise, so does optimism – and along with that, the propensity to invest. Thus, many investors fall prey to a “Reverse Shift” in asset allocation. In other words; fuelled by greed and fear, their asset allocation moves in the exact opposite direction than it should.

For your portfolio to succeed, you’ll need to break out of this rut once and for all. Stick to your broad, strategic asset allocation plan (for example, a 50:50 split between equity and debt assets) regardless of what’s going on in the mad, mad world around you. This involves the periodic sale of an asset on the way up and the periodic purchase of an asset on the way down. You’ll be surprised at how this simple habit can influence your portfolio in the long run.

Speculative Mindset

When the going is good, and when asset prices have already risen, both confidence and optimism tend to spike; lending the courage to actually go ahead and invest after they’ve been sitting on the fences for extended periods of time. This is dangerous for two reasons: one, the time might actually be ripe to start going underweight in that particular asset class. Two, the investor’s mindset may be dangerously speculative, just waiting to leap off the train at the first sign of turbulence. Equities, real estate, gold, deposits – you name the asset class, and the behavioural patterns remain just the same.

When you’re building a portfolio, make sure you’re not actually going in to make a quick buck. Asset classes will go through cycles, and often not precisely as per plans. Be prepared to weather the storm and stay put, or you’ll end up catching the bull by its tail (or getting mauled by the bears) more times than you can count. Understand the investment horizon applicable for each asset class and be prepared to stick it out until and unless something changes dramatically at the structural level (for instance, if the country itself gets downgraded it might call for a complete shift in your asset allocation strategy).

Reacting to News

A close cousin of the speculative mindset is the ‘reacting to news’ habit.  As many as nine out of ten times, news flows warrant no action whatsoever. Somebody wisely suggested that in the short run, markets are voting machines whereas in the long run, markets are weighing machines. Trading the news is like bolting the door after the horse has fled; markets almost never react to the news, but rather incorporate the most likely outcome of the news event in the run-up to the actual occurrence itself. Shocking and unanticipated news, on the other hand, might create entry points into otherwise fundamentally strong asset classes. The Ukraine War, Crude Prices, Rising inflation – all these news flows have surely created ripples in the markets of late, but prancing about after reading all these sensational headlines wouldn’t have done your portfolio any good. The SENSEX is still holding up at nearly 60,000 - and in the long run, will be a slave to earnings growth and not much else.