Are Your Investments Asleep? A Wake-Up Call for Proactive Monitoring

Are Your Investments Asleep? A Wake-Up Call for Proactive Monitoring

Before you start reading this article, let's put your memory to the test. Set a timer for 2 minutes, and in that brief window, try to recall the names of the specific mutual fund schemes you own. Don't just list the asset management company (AMC) name, but rather, aim to jot down the precise fund names such as HDFC Small Cap or HDFC Balanced Advantage Fund. Afterwards, give yourself another 2-minute challenge to recollect the individual stocks within your portfolio.

Did you Pass Or Fail?

If you successfully passed this test, you're part of the fortunate 10% with a strong grasp of your financial assets, and you might consider skipping further reading. However, if you can't recall your investments, it's a warning sign – after all, if you can't remember what you own, how can you effectively manage and monitor them? This could be a significant concern, especially if you lack a financial advisor. But fear not, we'll explore the reasons your investments might be in a slumber and offer solutions to help you reawaken your dormant portfolio. Continue reading to discover how to make your investments work for you.

Investment Insomnia: Loss Aversion

Short-term investing is a strategy that many pursue, hoping to capitalise on market fluctuations. However, what often occurs is quite the opposite. When the stocks bought for the short term start plummeting in value, investors often freeze.

Ranbeer got a hot tip about Delta Corp, a company in the casino business when its shares were at 200 Rs. He hesitated and missed the boat. When the price went up to 300 Rs, he panicked about missing out and bought 1000 shares, but then the government dropped new rules, and the stock fell 10%. He promised himself he'd sell when it broke even, but instead, the stock took a nosedive, down 40%, taking more than half of his money. Ranbeer's story is a reminder that playing in the market without a clear plan can be a real rollercoaster and I am sure that you might have also faced this once in your lifetime.

The fear of realising a loss is a powerful psychological barrier, and it leads to the phenomenon known as "loss aversion." Loss aversion is a cognitive bias that compels individuals to strongly prefer avoiding losses over acquiring equivalent gains. When a stock bought for a quick profit starts declining, investors grapple with the fear of losing money. This fear can be paralysing, and it often leads to inaction – they keep holding onto the lost investment, hoping it will recover. As time goes by, these sidelined, losing stocks become dormant in your portfolio, effectively putting your investment strategy to sleep. The portfolio stagnates, while other opportunities may be passing you by. Your investments are no longer working for you; they're merely taking up space.

The above graph illustrates a crucial point: when your investments decline in value, you'll need to make even greater gains to recover. For example, if your investments drop by 50%, you won't break even with a 50% increase; you'd need a 100% uptick in your portfolio to get back to where you started. This underscores the importance of cutting losses early and not succumbing to the trap of loss aversion.

Are your investments snoring? ( Diversification drowsiness )

Apart from the loss aversion bias another common mistake investor make is neglecting the smaller allocations in their portfolio. People tend to focus on their major investments, often leaving the smaller positions unattended. Hrithik had put his money into a whopping 236 different stocks. But here's the catch: over 200 of them were like tiny drops in a big ocean, making up less than 1% each. The movement of any individual stocks wouldn’t be material enough to move the portfolio. It was like trying to keep track of a jumble of puzzle pieces.

These smaller investments when clubbed together would have a significant impact on your portfolio and may be the reason for your portfolio’s underperformance. Therefore, it’s very crucial to keep track of your entire portfolio right from the highest allocation investment to the lowest allocation investment. Well, tracking 50 stocks at a time is not a cup of tea for all retail investors, that’s why you should get help from financial advisors who can easily help with their professional expertise.

Sleepwalking Through Investments: The Perils of Non-Monitoring

Consider Shah Rukh, a busy professional, who once adopted an investment strategy without diligent oversight. He had a diverse portfolio of mutual funds, ranging from well-established equity funds to global market funds. As he got more delved into his work commitments, he didn’t get much time to monitor his investments. Fast forward a few years and one of his global funds turned out to be a significant laggard returning only 6% returns in 10 years’ time way underperforming the benchmark which gave 13% returns. Shah Rukh's experience underscores the risks of neglecting monitoring in the realm of investments, where a lack of vigilance can lead to unexpected financial setbacks. Failing to conduct regular checks and updates can result in missed opportunities, unforeseen losses, and a diminished ability to shape your financial future. This scenario underscores the importance of active monitoring and involvement in the world of investments.

Returns as of 31st Oct 2023

It’s time to rouse your investments from their slumber. Here are a few steps to consider:

  • Schedule routine check-ins with your investments. Assess their performance and relevance to your financial goals. Are they still aligned with your objectives?

  • Recognize the power of loss aversion and confront it. Sometimes, it's better to cut your losses and reallocate your resources to more promising opportunities. Remember, losses are part of investing, and avoiding them altogether is unrealistic.

  • Ensure your portfolio is diversified to spread risk. Selling losing investments might free up capital for better opportunities, or it could be reinvested in a diversified portfolio.

  • If managing your investments feels overwhelming, consider consulting a financial advisor. They can provide valuable insights and help you create a strategy that works for you.

Ladderup Wealth since 2011 has broken the ranks and established itself as one of the most premier wealth management firms in the country. Your wealth is irreplacable and you have acquired it after decades of hard work. It is important that it is constantly monitored and nurtured with the right approach. You might not have the right time/skills to do it yourselves but we can help you on that journey. Improper and incompetent advice can have long term side effects on your wealth, so please choose wisely. Get in touch with us via our website today.