Chasing investing trends will not make you rich

I never thought I will observe investor behaviour through the viewership of You Tube videos. Educational videos with content on important aspects related to personal finance garner few views, but videos reviewing new fund offers (NFOs) or initial public offers (IPOs) have much higher viewership.


I often wonder what drives investors to chase trends and investment fads. In my sessions over the last six months, the maximum number of questions have been on international stocks, gold and index funds. I always lament the lack of queries on financial planning and the entire focus on investment products.

The love for NFOs and IPOs too baffles me. With IPO allotment being paltry, are the listing gains really going to make a big difference in the portfolio? Most NFOs from mutual funds too have been capitalizing on trends like healthcare, index investing, allocation to gold and international stocks. Pretty much every NFO is adding international stock exposure like it’s a panacea for improving performance. Investors too are lapping up these themes, but they should remember that thematic funds use alluring narratives to pull in investors. I would rate these NFOs akin to investing into venture funds—very risky and volatile. Most investors choose these without being aware of the perils involved.

It is difficult for investors to assess the risk when everybody around them is gloating about how they made fantastic returns on a particular product. A friend, who hasn’t invested in gold apart from her wedding jewellery, is investing in Sovereign Gold Bonds (SGBs) only because her siblings are investing, and they were told by the elders in the family that the gold price is expected to cross 1 lakh per 10 grams. Another problem is that individuals have low attention span when it comes to investing. This coupled with a deluge of information in media on the latest “in thing” leads to the tendency to invest in the first thing that catches the eye. Everybody knows the mutual fund disclaimer on past performance. Yet most choose funds based on recent performance. They believe that in the coming period, they will make similar returns to that in the last one year.

Trends will come and go. Themes may take time to play out and even if they play out, they may be short-lived. The current trend may not even play out. Or investors may be getting into a theme after the stocks in the theme have already rallied. A case in point is healthcare, which has been the top performing sector in calendar year 2020.

I always get questions about the best investment and my view is that there is no such thing. A good investment is one which is aligned with your financial goal, fits into your asset allocation, helps you diversify and fits your risk profile. To find such an investment, you need to start by learning the basics, and understand risk and volatility. In my friend’s case, I advised her to evaluate if she had a eight-year goal for which she was choosing SGBs, what would be her overall allocation to gold post this investment and if she was aware of the volatility or the possibility of gold returns stagnating (as was the case from 2013-2015).

The plethora of real-time information available, makes investors check their investments ever so often. This tempts them to move into more happening products or investment fads by churning their old investments. Many investors feel that just remaining invested means not managing the portfolio actively. The reality is that choosing investments based on goals and staying invested is the key to building wealth in the long term. Hence, investors should introduce deterrents like checking portfolio only once a quarter or removing tracking applications from their phone. Investors who want to capture trends can have a small portion of their investible amount, say up to 5%, kept aside for this purpose. But this should be done only after planning for core goals.

In Investing, it is not about how much you make, but rather how much you don’t lose.

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Photo Credit: Mint

Source: Article written by Mrin Agarwal in Livemint

Originally published on: 19 Oct 2020

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