Return on Investment (ROI) is a term that is thrown about quite often while we talk about factors influencing investment decisions. Proactively building and monitoring a portfolio that can deliver spectacular returns might sound like a dream come true for many aspiring investors. This however widely differs from financial securities that are built with the goal of wealth creation.
Problems associated with investing for returns:
Short-term view affects long-term investments
Decisions influenced by short term market fluctuations result in an inordinate churn in your portfolio. This chasing the rainbow kind of approach leaves you moving from investment to investment without you spending enough time in any particular asset class for it to play out its cycle to your advantage. There’s no need to adopt a completely reactionary approach by re-structuring your investment portfolio with every market movement. Trust the sound investment decisions that you have made and stick to them unless you get solid evidence to the contrary.
Behavior gaps deplete returns
Even though we are well aware of the benefits of keeping a long-term view while building a strong portfolio of investments, the opportunities to make quick gains that keep arising in the financial markets from time to time keep interfering with our strategic outlook. Over time it also alters our behavioural approach by changing the way we react to information regarding sudden highs and lows of the market. This often futile attempt to time the market reduces the benefit we receive from compounding and the rupee cost averaging.
Accumulating assets that don’t match your goals
People who prioritize returns maximization usually get attracted by the enticing short term past returns and usually buy into investments that are very near their peak. Basing your investment decisions by gazing at the market through the rearview mirror isn’t the prudent thing to do. A rally in the small and midcaps in 2017 caused people to invest in them in 2018 only to gain a first-hand experience of their spectacular fall. Getting into a winning position often involves moving against the market by investing in assets near the end of a bad cycle to make gains in the future.
What do smart Investors do?
Ignore short-term volatility
Actions taken to make gains, in the long run, require a matching monitoring approach. It’s almost pointless to watch their value fluctuate on a daily basis. Sharp short term movements in the market could lead to decisions driven by panic. These investments do need to be checked on now and then systematically on a periodic basis with an objective mind. Doing it regularly on a daily basis would introduce biases in our thinking and in a long term view is just a recipe for disaster.
Goals over returns
A tried and tested investment maxim is to keep your goals in mind while making investment decisions. It’s paramount that each investor should achieve their investment objectives. Keeping your goals in mind also acts as an anchor in saving you from making risky decisions which could prove to be costly mistakes and have a detrimental effect on your portfolio by setting it back a few years.
Know your investments
Just as financial companies have realized the importance of KYC nowadays it’s also true for investors to be thoroughly acquainted with the potentials of risks and rewards before they make any investment. Only once they are satisfied, that they are comfortable with the potential value fluctuations that they will experience during the investment life cycle, should they make the decision to invest.
The ratio matters (Strategically investing)
Smart investors invest the bulk of their assets into long term and seemingly passive assets and use their balance funds to play around across different sectors and themes that they believe might outperform the market. This “core & satellite” strategy enables them to keep tight control over the risks that their portfolio is exposed to while also taking advantage of opportunities that keep showing up in the market.
The goal should be on wealth creation and not just on attempts to get rich quick through rash decisions made on baseless market speculation. Investment decisions should be guided by the principles of financial well being for the short, medium, and long term perspective.