When it comes to the stock market, some people wish to make money overnight and sometimes pay the price for bad investment decisions based on “tips” received from friends, acquaintances or colleagues.
While some such tips may pay off at times yielding short term gains, more often than not it ends up depleting the value of one’s portfolio. Read on to find out how poor investment advice may wreck your portfolio, as against painstakingly done research analysis that will yield long term gains for you.
Poorly researched “tips” may destroy your portfolio
The lack of an organized approach and well thought out investment decisions may mess up your portfolio and leave your financial goals in jeopardy. Nobody has a crystal ball when it comes to the stock market, but an investment advice that comes based on poor knowledge of the stock markets, lack of thorough research and due diligence may cost you dearly.
The most common mistake that investors make is to apply a “hot tip” that has come as a result of what is called “momentum investing” in financial parlance. Playing on the greed of unsuspecting investors, there are several people out there who may be recommending “hot” stocks to you, giving you the impression that it is “easy money”. What they don’t tell you though, is that, such investments can rake in huge losses when the tide turns. Take for instance the technology bubble that built up in the late 90’s and finally came undone by the year 2002 that saw many investors lose their shirt in the market.
Besides, even if you were the receive a tip from a person who you think has high financial acumen, you may not realise that the person recommending it you, is unaware of whether his so called “sound advice” may actually result in the concentration of risks for you. Risk appetite is a primary consideration in your portfolio construction and should not be compromised with.
The other trap that some naïve investors fall prey to is taking the advice of some overconfident investors who particularly go about beating their drum when the markets are in a strong bull phase. If their stock picks have done relatively well, you can be rest assured that the price increase they may have witnessed is thanks to the bull run and not their brains!
In fact the cardinal investment mistake that these chaps make is that they look only at the upside potential and not the downside risk on such investments. As a result when you take their advice you may end up with a volatile and risky portfolio that can nosedive even if there is a short term blip in the market.
As you may have figured by now, taking arbitrary advice and making ill informed investment decisions may have dire consequences. You may end up owning an assortment of stocks that does not match your risk appetite and may be highly prone to volatility. This beats the very purpose of any portfolio construction.
Sound research analysis- the cornerstone of good portfolio construction
Instead of random “stock selection” based on arbitrary advice, it is imperative that you invest as per your risk profile, investment objectives and time horizon. Gone are the days when there used to simple stock selection. With a plethora of options available the need of the day is to implement investment strategies that enhance your portfolio.
Needless to say, these strategies can emerge only if it is based on sound research analysis. Research analysis is an important tool used by qualified and professional for the enhancement of one’s portfolio. These professionals have a thorough understanding of the markets, the stocks or investments in question and the impact they can have on an investor’s portfolio based on his personality, financial goals and risk appetite.
Sound research happens when professionals do not just stare into Bloomberg terminals but when they understand the business, by making a number or visits to the company, talk with the management, keep their ears open at corporate gatherings and finally can interpret with an open yet cynical mind. Research like everything else must be solid, disciplined and most of all unbiased.
Therefore in today’s complex world, where portfolio construction is difficult, you should only rely on sound and unbiased investment advice that stems from solid research analysis. If you do not have the time or wherewithal to carry out the research analysis yourself, the best thing to do is to leave this job to professionals. Basing your investment decisions on tips therefore must be avoided at all counts.