Bad Habits of Retail Investors

I was referred by one of my client to his friend recently to help him with a financial plan. I went through his friend's needs, insurance and investments just like any of my other prospects. He is a single professional in the mid 40s. He believes in accumulating his wealth towards retirement and to take care of his aging parents.

When we started to touch on investments, he opened up and told me that he was rather depressed over the investments he made over the last 2 years when he had lost more than 60% of his life savings. He was a saver until the period from Sep06 to Apr08 when he invested into Shares and Unit Trusts.

When he passed his pile of investment statements to me, I nearly fainted. I can understand why he was depressed.

1) Accmulated too much cash

* For 20 years, he saved all his money in fixed deposits and structured products from the bank. He accumulated quite a large amount till he was frustrated with the low interest rate and was tempted with the rising equity market.

* He followed his colleagues into buying shares and purchased Unit Trusts from banks and Fundsupermart, all over a short span of 1.5 years. Nearly all his 20 years savings are put for investment over that 18 months.

2) Over and Under Diversification

* For his shares portfolio, he was under diversified. He owns many China based shares because China Shares are so strong and volatile then. The rest are penny stocks which I barely heard of.

* For his Unit Trust portfolio, he was over diversified. He purchased at least 20 different Unit Trusts from Banks and Fundsupermart. Out of the 20, he has 12 asia funds, 2 commodities funds, 2 property funds, 1 middle east and the rest theme funds. He was confused over what he purchased and knows that many of the funds are duplicative. He said that he has no time to look through his overall portfolio and just watch how his funds lost value.

3) Buying into Flavour of the month

* He walked into the bank one day and was convinced by a lady banker. From then, that banker always called him to update him on "Flavour of the month". He invested into several property funds and China India funds. He believe that new funds are always better just because it start with $1.

* He was excited with his inital profits and started to invest more of his savings.

* He later invested into Middle-east, Latin America, Commodities and all sort of funds like climate change, which many of them are new launches.

4) Surrender and stop investing

* His last purchased was into Commodities, Middle East and Financials in Apr08 when he heard many comments on how these sectors will outperform the rest of the world. The value dropped by 50% since then. He surrendered after that and swore that he will never invest again. He insisted that investments are not for him and became very pessimistic towards it.

3 things I like to highlight here:

a) Look for a trusted adviser earlier to help manage your funds if you have no idea how to do it. They can show you how to diversify your funds correctly and to avoid fundamental investment mistakes. Some bankers or FAs are just interested in selling either a new, hot, or top performing fund.

b) Try to invest part of your cash on a regular basis. Adopt dollar-cost averaging for part of your investments. Too much cash can be a headache and you may take higher risk unknowningly.

c) Don't give up and stop investing during bad times. Greed is what make one invest during boom period. Fear is the one stopping you now. Understand your investment objectives and risk profiling. remove your fear and continue to invest if you are able to.