As the New Year dawns, it brings with it new hopes, new optimism and new aspirations. But for your investment strategy to even remotely succeed, it is essential to avoid some investment mistakes, which investors are most likely to make in 2023. Here are the top five mistakes to avoid in year 2023:
Do not fall for the Big Bang theory
Year 2023 is going to be tough on companies and stocks that sell you a hazy dreams into the future. Artificial intelligence, machine learning, IOT, EVs and green hydrogen all look wonderful and all of them certainly have immense potential. But the stock markets in 2023 are going to ask a lot of tougher questions. Where will the cash flows come from? What will be cash burn? How many quarters to operating profits? In short, 2023 is not going to be a year of the Big Bang stories. It is going to be a lot more about ground reality.
Ignoring the power of bonds
In the last 15 years since the financial crisis, there has been a huge trend towards equities. In a sense it has been the TINA factor. Most bonds have been yielding negative real returns. Year 2023 could be the year when debt could again emerge as a serious contender for its place in portfolios. Rates have spiked and inflation is coming down. Issuers are in much better shape in terms of low leverage and solvency. And if yields eventually trend lower, the capital appreciation will be icing on the cake.
Keeping investment outlay constant
Investors have probably made this mistake for too long. Most SIP and other investment calculators typically suggest constant level of savings and investments each year. If your income levels go up and your investments stay constant, you are wasting your potential to invest. Year 2023 will mark a cusp in India’s long term growth. It is time to seriously look at gradually expanding your investment outlay, at least in a manner that matches your potential.
Mistaking diversity for diversification
Why are we specifically making this point? Year 2023 could be a year of strange correlations. It is not just about correlations today, but whether these correlations will sustain. Diversity is just adding stocks. That worked for a long time. Now it is time to focus on targeted diversification. It is not enough to combine assets with low correlation. It is also essential to monitor this correlation continuously. Just adding more stocks or spreading across more assets will not be sufficient in 2023.
Ignoring asset allocation
In markets there is a saying that the more things change, the more they remain the same. And more the markets appear to get complicated, they more they remain simple at the core. Year 2023 will continue to be driven by asset allocation. Your alpha will not be driven by stock selection or churn or timing. It will come from asset allocation. You only ignore this at your own peril.
Year 2023 is not only a time to be selective, but also aggressive. The moral of the story is not to ignore asset allocation.
(Garg is Chief of Business at blinkX, JM Financial)
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