Portfolio Disorders

PORTFOLIO DISORDERS


Investor’s behavioral biases and industry’s unethical practices lead to portfolio disorders. These disorders lead to creation of sub-optimal portfolio. This in turn limits the portfolio's performance. Investor doesn't realize the impact in the short term, but in the long term, this leads to investor dissonance when investor understands the massive difference between the wealth created by his/her portfolio and what could have been created, had portfolio been an optimal. This is what differentiates wealthy and prosperous investors from intelligent investors. Your portfolio is also victim to one or all of these portfolio disorders and these are the reasons for its under-performance


FIXED DEPOSIT DISORDER

This disorder is present in more than 90% investors’ portfolios as their portfolios comprise of FD and FD-type of assets owing to investors lack of understanding and risk averse nature. Even if you have one rupee lying in FDs, your portfolio is a victim of this disorder. What most do not realize is that this disorder destroys the portfolios’ returns and over a period of time reduces wealth in terms of purchasing power as FD return doesn’t even beat inflation. There is no reason to lose to this disorder given that there are safe debt funds available that have better returns, better liquidity, and better tax efficiency. Also, one must understand time horizon and take some risk while investing for long term.

ASSET ALLOCATION DISORDER

This disorder is also present in most investors’ portfolios as most portfolios are sub-optimally created. Portfolios are either too risk averse or too risk prone. Also, asset allocation follows a trend. More and more equity allocations are made and when markets are high and rising, and more debt allocations are made when markets are low and correcting. This disorder is avoidable with better understanding of when and why one must invest in equity and when to stay away. Simple rule to follow is, “if horizon is more than 10 years, equity is the best investment and must be adopted confidently. However, one must be cognizant of valuations while doing any lump sum investments when markets are expensive. At expensive valuations, one must practice caution and follow systematic investing. Debt investments are important as these act as speed breaks, and help in portfolio re-balancing apart from fulfilling the liquidity needs for short term goals. Like a portfolio that is skewed towards debt is not the optimal allocation, similarly a portfolio which is 100% skewed towards equity is also not the best and optimal - it’s like driving a car without breaks!

OVER DIVERSIFICATION DISORDER

This is the most common disorder present in every second mutual fund portfolio as investors like to keep all types of flavors in the name of diversification. Like there is a saying that “Excess of everything is bad” so is over–diversification. Good and consistent performance is not easy to achieve and is rare. Adding more and more products increases the probability of portfolio losing this as good performance gets balanced with bad performance.

INVESTMENT EXPENSE DISORDER

This is another disorder, rather an evil that could be very harmful to the portfolio especially if the portfolio comprises of expensive funds that are added without proper research and with the motivation of high commissions. Hidden commission may be is less bad in terms of cost, is worse in terms of bad advice that it motivates as bad advice leads to bad decisions which creates permanent loss.

PRODUCT SELECTION DISORDER

This is not as common as other disorders, but is prevalent in form of lock-in products in some portfolios. Market is flooded with hundreds of good as well as bad products. One bad product spoils the portfolio returns especially if allocation to bad products is high. So, scouting the market and careful selection of right product is very crucial to better performance.

Client Testimonials

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