Covid-19 second wave: Six money mistakes investors should avoid

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The stock market meltdown that ensued with the spread of the COVID-19 viral disease in the beginning of 2020 was triggered by widespread fears among investors about the impact of the pandemic on the economic and earnings growth. The complete halt of all commerce and trade activities following the longest-ever lockdown imposed by states and the uncertainties around the disease spooked market sentiments, leading to across-the-board sales by investors.

Few months on, the investors who had fled the markets in a flurry were left biting their nails as not just the stocks markets had bounced back, but they had also breached all-time previous year highs. However, the investors who had shown perseverance, planned their investments well and held on to their portfolios, came out with the biggest ever gains notwithstanding the market turmoil, thus proving the need of keeping patience in stock market dealings.

With the country once again fighting the battle against the second and seemingly a more virulent coronavirus contagion, the patience of investors is likely to be tested again and perhaps many times over in the coming months.

Investors who tread their way with caution, make prudent and planned decisions and show immense perseverance will survive the test of times once again. They are likely to do well if they avoid making certain common mistakes as listed below in the wake of the uncertainties around COVID 2.0.

Lack of goal-oriented investing

It is always prudent to have a well-defined investment philosophy and deploy the best tools to achieve these set goals. The investment goal can be anything – from saving up for children’s foreign education, to creating a retirement fund, travelling overseas, creating a nest egg, etc. Investors, must, however, ensure their investment goals are aligned to their own risk tolerance, their real needs, and the resources that can be tapped for meeting these goals.

Lack of optimal asset allocation

Trying to time the market is yet another common mistake that stock market investors make. Not only it’s challenging to time the market, but also the most seasoned investors can’t almost never get it right. For investors, their return on investments largely depends on optimal asset allocation and not market timing.

Losing patience

Long-term investments succeed based on the duration given for these investments to grow and mature. The longer they last, the better are the returns. Investors must, therefore, look beyond short-term volatilities and concentrate on the market’s long-term growth potential. it’s crucial for investors to stay the course and stay invested, provided they have the funding feasibility.

Looking at historical performance

It is a proven fact that stock markets produce the highest gains over long time periods. Hence, for long-term investors, predicting the market is not practical, more so when the markets are passing through unpredictable phases of volatility. Hence, the goal should be to build a portfolio with a long-term investment horizon, with historical performance only serving as risk indicators for assets.

FOMO trades

Fear of missing out (FOMO) trades generally occur after a sharp rally or slump in a stock, which triggers an irrepressible urge among investors to jump on to the bandwagon and become a part of the price movement, ignoring all rational and analytical indicators about the actual direction of the stock movement. Investors must never rush with their investment decisions just because they did not want to “miss” an opportunity. If they don’t wait for a few days to buy or sell a stock, then they’re probably making an emotional decision.

Overdiversify

Diversification is a great risk management tool when used properly. It is important that investors diversify their portfolios both in terms of allocation across different asset classes, as well as within an asset class. For instance, while diversifying a US stock portfolio, they can think of adding unrelated assets like equity, bond funds, commodity ETFs, REITs, gold, etc.  However, over diversifying may sometimes increase risks, transaction costs and impact returns of a portfolio.

(The writer is Chief Operating Officer at MNCL. Views expressed are personal)