In constructing your portfolio, you may stumble upon these mistakes. You should avoid them at all times. Take a look below.
Proprietary Products
If you go to a specific bank, you will be presented with a certain collection of funds. It’s possible that those are the ones it will recommend even though they may not be the most cost-effective ones or the best performance.
In reality, you have to have an advisor to get a truly objective selection. That advisor should not be tied to any specific product or bank.
Risk Overexposure
You also have to be careful about lumpy risks, or the dangerous overinvestment in a certain sector or asset class. When you do this, the value of your portfolio will go up or down in large, wild chunks, depending on the movements of the overinvested sector.
Obviously, diversification is not achieved in this method. Too much exposure to any one type of asset or investment is risky.
Bear in mind that you don’t get diversified by just investing in a lot of different equities or different types of bonds. You achieve it a careful, mixture of non-correlating asset types. It’s recommended to have at least all three dominant assets (stocks, bonds, properties) along with other investments.
Illiquidity
Liquidity and the lack of it are equally important issues that you want to pay attention to. The lacking in liquidity takes place when there is a timing difference between investment goals and the need to access money from the portfolio.
For instance, an investment in equities for most investors should be made with a long-term focus. On the other hand, if you need money in the short to medium term for a single purpose like buying a car or a house, the funds set aside for that purpose ought to be kept out of the equities markets.
Nothing can be more disastrous than desperately needing money from an investment that is currently way below its purchase price.
Domestic Bias
Another common problem is home bias. Most investors depend too much on domestic investments, which very much limit diversification. A good portfolio will not shy away from foreign investments. While they often seem riskier, they may carry no more risk than domestic products. Their non-correlation with domestic products can decrease the overall risk of a portfolio.
That means that foreign funds have high risks, but you can have them at a sensible amount can lower your risks as a whole. On the other hand, keep in mind that foreign investments do come with their own specific risks, including currency translations risks.
Not Paying Attention
Failing to monitor your portfolio may lead to disastrous results for your returns. The investment and capital markets can change quickly and often massively.
There are periods when it is good to have more equities than bonds and vice versa. In a similar manner, there are times when it is better to have relatively large amounts of cash, while other instances may prove that it’s unwise.
Monitoring also lets you guarantee that the reasons behind your investments remain intact. If they have changed, you can make adjustments before your portfolio’s performance if affected badly.