The lifetime of a typical investment corpus is many decades long. Our investment corpuses often outlast our own lives. Decisions that optimise short term gains while ignoring the long term effects can end up causing a net loss.
1. Don’t invest in active strategies (such as active mutual funds, PMS funds, Smallcase, etc) if you don’t absolutely trust the firm running the fund/strategy. The fund manager will be gone in a few years, or at best a few decades. The market dynamics will change in a few decades. Will this strategy still be a winning strategy? Do you have a plan for managing the situation when the tables turn?
1a — Corollary: If you have an active strategy that you can execute on your own, and you can execute it without much hassle for decades, you can definitely follow it. But barely anyone knows such a strategy and have the conviction to bet large sums of money on that strategy.
2. Don’t get into half-baked strategies like Coffee Can Investing. Don’t enter the equity market like an Abhimanyu. You need to know when to exit and how to exit. It is not wise to assume that great companies of today will remain great investments forever.
3. Don’t invest in sectoral or thematic funds that are expected to do well in the next few years. They will see a slump after those few years. What will you do then?
3a. Don’t buy overnight sensations (such as the Nvidias/Teslas or Quant AMC funds or crypto assets) in the hope of making quick money. Yes, you may make quick money in the next few years. Can you hold onto those investments for the next 40 or 50 years? (Remember that a typical retirement corpus has a lifetime of 70 years or so.)
Both sectoral/thematic bets and overnight sensations require you to know when to exit. Unless you time the exit precisely, you may lose quite a bit of money. The vast majority of retail investors cannot exit on time. Hence, it’s better to simply swallow the FOMO (fear of missing out) and stay away from these temptations.
4. Don’t add portfolio clutter that is hard to manage. Either you will be dead and your family will have to declutter your messy portfolio. Or you will get old and won’t have the vigour to manage a cluttered portfolio. (See also: A cluttered portfolio is not a problem—it’s a symptom)
5. Don’t be afraid to correct your mistakes even if it is costly in the short term. It’s better to pay capital gain taxes today and exit a bad fund/strategy than to put your portfolio under unnecessary risk for many more years.
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