Inaction and over action in Financial Management
To be able to manage one’s wealth efficiently, one need to be active about it.
One common mistake investors make is allowing their emotions to influence their investment decisions. Many people invest their money when there is an availability of new product and there is a buzz around it. In future they generally don’t even review whether their investments are performing well or not. This emotion of buying whats in trend causes illogical investment decision. Not to act after making investment causes multiple folios that were created many years ago and physical shares in paper, un-cashed dividend warrants, merged and renamed companies, un-cashed fixed deposits / MIS are the skeletons in the financial cupboard. When the time comes to resolve all these matter, it is havoc for the individual to put all this in order. It makes the portfolio confusing and scattered. It will take a huge effort and time to put it in order.
When the investment is made in a fashioned way of new product, it causes over diversification and also costs heavily to the investors. After that taking no action is a poison in one’s financial health. People remain busy in earning money and don’t give preference to their personal finance management. When the investment is done to envy the neighbour/ friend, it generally results in unhealthy portfolio.
Other common mistake investor make is taking too much action in managing their finance. Investors churns their portfolio frequently according to market emotions or buy new product after selling the old ones without any reason. When the stock market goes up, people put their money into the equity and when the market goes down they pull their money out. They continuously buy at high levels and sell at low levels. The returns for this type of emotional investor are substantially lower than the historical returns. The problem here is the human reaction to good news and bad news is to over react. This emotional reaction causes illogical investment decisions.
An inactive investor wants to diversify and pick maximum products without knowing the features and its impact on his portfolio. On the contrary, over-active investors try to earn more return by churning the funds without knowing the hidden charges and their adverse impact in their portfolio. While being inactive and over-active in managing portfolio will hurt them rather than help them. The attempt to diversify away all risk is a TRAP.
Investment should be done in a disciplined manner knowing the need, risk and time horizon. It should be diversified in different assets according to the time frame of goals. And after that there should be a check for the performance of the portfolio. Review and monitoring of the portfolio after every six months or one year is needed to manage the portfolio in a proper way. A balanced portfolio is a key to ensuring steady and growing returns.
However, the movement of different asset class over time causes the initial investment to change. Therefore, rebalancing is needed between different asset classes as per the investor’s appropriate allocation. And when investor is near to his financial goal the allocation for that particular goal should be slowly and gradually transferred to the risk-free asset class. By doing this the investor is able to achieve their goals at reduced risk. What is best for the investor is making a financial plan and it will actually maintain without procrastination. Only a little time each year to implement, which means that you are more likely to get it done. Annual rebalancing is simple and cost effective and it takes little effort .
To sum up, one should not be inactive or over active while managing their investment, Investment should be made in strategical way with an alignment to their goals, risk apetite and time horizon.