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Why Mimicking Your Friend's Investments Can Be Risky - Outside View by PersonalFN
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Why Mimicking Your Friend's Investments Can Be Risky
Oct 12, 2017

Many individuals often assume it is okay to copy and paste. The trend is not limited just to text but flows through all forms of media-arts, music, filmmaking, programming, etc. While copy-paste may be a lazy way out, it is unethical and can land you in all sorts of trouble. What's worse, it puts the brakes on intellect and creativity.

Copycat investing too, is a widely prevalent practice. Here investors mimic portfolios of top investors without any underlying research of their own. What the copycat investors do not realise is the risk-return potential considered by the top investors. While top investors are prepared for high volatility, the copycat investors may be caught unawares. Portfolios are usually disclosed on a monthly or quarterly basis, thus, there can be lag in trading, raising the risks further.

Some amateur investors may not go to the extent of copying top investors. They may take advice of friends or relatives. Often at social meetings, individuals exchange their thoughts on the markets and their investment strategies. Some may even share their portfolio details.

However, just because your friend earned a return of 15% compounded over three years from a particular mutual fund, it does not mean you should add it to your portfolio. Aping your friend's portfolio can be extremely risky.

First, you both are unique individuals with different tolerance and perception of risks; your income, savings, and tax brackets may differ. Second, there's a difference in financial goals and investment horizons. And lastly, a mutual fund or any other financial product bought a few years ago may not always be suitable for investment today. Fund performance may change, the investment mandate may change, and even the regulatory environment may evolve, making it necessary to reassess the scheme once again before investing.

Thus, take the extra time and effort to create and align your portfolio to different financial goals.

Below is a simple 5-step process to streamline your investments:

  1. Quantify Your Financial Goals

    Assess your financial goals and consider what it will cost to achieve them. If you aim to provide for your children's education and wedding expenses, consider what it costs today and calculate this cost by the average yearly rate of inflation. Start by knowing the amount you want to achieve, and by when you want to achieve it. Do this exercise for each goal.
  2. Align Your Savings Towards Your Financial Goals & Risk Profile

    If your investments are randomly made without being goal-centric, align your current investments towards your financial goals, viz. buying a dream home, a car, funding you're your children's education, their wedding expenses, your retirement life, among others. Ad-hoc investments lead to improper asset allocation; ensure all your future investments are done with your financial goals in mind.

    It is ideal to allocate your investible surplus into various asset classes, with due consideration to your age, income & expenses, assets & liabilities, risk profile, investment objectives, and nearness to financial goal horizon. This way investment can be done optimally while managing the risk involved to accrue returns. This will provide you with a clear course for your investments, instead of investing in a sporadic manner, and/or in the endeavour to save tax during the financial year by exploring investment avenues under section 80C of the Income-tax Act, 1961.
  3. Choose The Right Assets

    The next step is to decide an investment mix that includes tax-saving investments as well as avenues to meet top priority life goals. So, don't chase the best performing mutual fund schemes, recognize the nitty-gritties of your financial plan, and choose the investment avenues beneficial for your investment portfolio.

    Based on the ideal asset allocation and the investment horizon of your financial goals, select appropriate investment avenues. For example, if you have a long-term investment horizon of 5-10 years or more, maintain a higher allocation towards equity. To have a fair idea of what your asset allocation should be, use our Asset Allocator.
  4. Remain Focused On Your Goals

    Once you have created an investment plan, keep it on track. Don't be swayed by the exuberance or fear of the short-term aberrations. Stay focused; don't panic with market volatility as long as the long-term funds are in place. If you have long-term investment goals, continue your investments irrespective of the short-term market movements, because historically, over the long term, equity has delivered inflation-beating returns (on an average).
  5. Save And Invest Regularly

    To attain financial freedom, above all, you have to be patient. Trust that you will get there. Wealth building is a gradual process. Don't be taken in by the fancy of structured products, the latest mutual fund recommended by your bank's personnel, or the hottest stock your neighbour has invested in.

    Your goals are probably looking pretty big once they have been quantified, as they should be. This kind of money takes years to build, and everybody starts small. Stick to your investment plan and within no time you'll be patting yourself on the back to achieve these goals, one at a time.

All it needs is a little time and effort to create an investment portfolio customised for your needs. You just require to have the right knowledge and patience. If needed, you may approach a Certified Financial Guardian who will streamline your investments keeping your needs in mind. Schedule a call with our Investment Adviser here.

If you have a financial plan in place, but are unsure about which mutual fund schemes to invest in, subscribe to PersonalFN's unbiased mutual fund research services. Along with quantitative parameters such as performance, PersonalFN also considers qualitative parameters such as portfolio characteristics while analysing mutual fund schemes.

By subscribing to FundSelect Plus you can benefit from the SEVEN time-tested, readymade equity and debt mutual fund portfolios. Based on your risk profile and investment horizon, you can choose out of four equity portfolios and three debt portfolios. In addition, you get a readymade tax-saving portfolio as well.

Don't miss out on exclusive discounts available and Subscribe Now!

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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