-By Varun Soni
“Make it simple, but significant”
We human beings prefer complex things over the simple ones, because simple things tend to bore us. From your phone to your sofa, everything is evolving with new features added to them, making them more complex and hence, desirable.
However, in the world of personal finance, this desire might essentially fuel your worst mistakes. Keeping your personal finance products simple is critically essential for your portfolio, the reason being that if you, as an investor completely understand the product you are investing in, the success or failure of the aforementioned product would be very clear for you to understand. On the other hand, if you had a very diverse portfolio of products which you don’t completely understand, even if your portfolio ends up showing net positive returns, you would not be able to understand the reason behind those returns and this just might crumble your wallet because if your portfolio starts falling down, you wouldn’t know which investments to get rid of in order to cut your losses, which investments to retain for the future and how you got positive returns in the first place, just because the whole situation is too complex to comprehend.
Here’s how you might be making your investments overcomplicated, and why you shouldn’t be:
1: Over-diversifying your portfolio:
Don’t get me wrong, diversifying your investments is important, afterall you should never put all of your eggs in one basket, which should be cle0arer now more than ever. During the pandemic, shares of oil giants like Royal Dutch Shell and Saudi Aramco plummeted very hard and at the same time renewable energy stocks, like Adani Green Energy performed good, with this one in particular giving 900% returns in 8 months. So, diversifying your investments is absolutely necessary in order to reduce your risks from market volatility. But, overdiversification of your investments will just end up reducing your returns, which in turn will make the ‘small reduction of risk’ by diversification pointless and would bring you to a ‘ no profit, no loss’ situation, not to mention the copious amount of research you would have to do to check the suitability of those investments in your portfolio.
2: Not knowing what you’re getting into:
While making an investment, not doing your due diligence regarding the investment and its suitability with your portfolio might just make things complicated. You would have to follow up on your investments at some point and you wouldn’t know what to expect. Instead, investing in products that you understand and find suitable would make things a lot easier. Also, buying investments due to the fear of missing out on riding the gains can potentially sink your hard-earned money. Remember the tech uprising? Some tech companies made it, and some dropped dead. If you would’ve invested in ‘My Space’ just because you didn’t want to miss out on the massive gains of the tech industry in the early 2000s, your money was as good as gone, but if you would’ve invested in google, you’d probably be a millionaire right now. Both of them were rapidly tech companies, but one of them just ended up horribly. So, don’t let your fear of missing out drain your wallet, instead do proper research and invest in what you understand and are confident about.
3: Fatigue of decision making:
Doing copious amounts of research every time you get into some money and want to invest it somewhere is dreadful and ultimately ends up making investing in financial products much more complicated than it needs to be. An easy solution to this is investing in products like mutual funds which require regular payments, while keeping your portfolio simple and devoid of confusion.
We as investors end up making our investments complicated without even realising it. Don’t be overwhelmed by the variety of investment opportunities available just a click away, always make sure that you understand what you are investing in and remember, a minimalistic and simple portfolio will take you a long, hassle-free way.