Stock markets have been on a roller coaster ride over the last 18 months, with investors experiencing moments of pessimism or euphoria during the ride. Maintaining the right financial temperament and well defined and prudent investment strategy are the two most essential factors in building and protecting wealth.
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Prudent financial temperament, supersede all investments decision as it allows to take charges of one’s emotion, a decision taken in such emotional moments may have an adverse impact on your wealth and seem illogical in retrospect.
A detailed and prudent investment strategy that considers your risk tolerance will invariably lead to well-diversified asset allocation and define a portfolio-level risk framework, which is a must. It will help you to avoid common mistakes likes failing to diversify, attempt to market timing, chasing returns without focus on fundamentals, taking large cash calls and not having a risk management mechanism for the portfolio.
When markets witness volatility and the value of investments gyrate, the two factors, as stated above, play an important and crucial role to avoid big mistakes which can have short- and long-term adverse impact on the returns of your investments.
The mistakes HNIs should avoid while managing their fortune:
Avoid being pernickety or fussy
It is always better to be hands-on with your finances and wealth, but what concerns is riches’ tendency to put too much emphasis on minor or trivial details, which loses sight of the “big picture”. Attaching unnecessary importance to either tax efficiency or resisting critical rebalancing of their portfolio for the want of saving exit loads, these are only a few of the examples.
Avoid being an emotional pendulum while making investment decisions!
Adopting a balanced and disciplined approach to one’s portfolios may sound easy, however, in practice, it becomes extremely difficult to follow. HNIs are often found oscillating between fence-sitting and super active when “FOMO” kicks in. To be able to invest successfully, HNIs must calmly focus on asset allocation and avoid this evil habit of an emotional pendulum.
Avoid drifting towards more complex; Even simple investments are equally critical
The more money you have, the higher the options you have for its deployment from plain vanilla products like stocks, MF, FD, bonds to more complex products like PE funds, art funds, real estate funds and structures. Heed to your advisor’s guidance and invest only when it merits incorporating the more complex products in your portfolio, not only because they are exotic.
Avoiding setting up Risk Management Framework at a portfolio level
The impact of outlier events on the portfolio is never underestimated; however, the risk management framework is often. A good framework ensures that the portfolio works well across various market cycles by managing significant tactical and strategic risks.
Cashing out winners early
There have been countless situations where winners have been sold way too early driven by capital appreciation. The principle of "take some off the table" just because the stock has suddenly moved up rather than driven by fundamentals is often seen. Do not let only the price movement influence your decision to cash out the winner and be guided by the underlying business.
The author, Prashant Joshi, is co-founder and partner at Fintrust Advisors. The views expressed are personal
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