How to avoid making behavioural pitfalls to build strong portfolio

Algorithms are going to rule the world in the long-term. It is not because they are smarter or better than a human being in making decisions, but because of their discipline and rule-based approach which keeps emotions out of the equation.

Below are some pointers to making a strong portfolio.

Set investment goals: Before starting your financial journey, you should know where your financial destination is. This will help you select the right kind of fund. A clear distinction should be made between your short-term goal of buying a house and a long-term goal like retirement planning.

Selecting the right instruments: Every investment instrument has its own risk and returns profile. You cannot interchange different instruments having different return and risk characteristics. Therefore, depending upon your financial goals, you should choose the right kind of instruments.

Diversify your portfolio: The age-old adage that do not put all your eggs in one basket holds perfectly true in case of investments. Hence, you should own different securities as well as different sub-categories of these securities. For example, if you are holding equity fund you should hold equity funds dedicated to large-cap, small-cap and mid-cap in different proportion.

Make your investment convenient and automatic: Even if you have identified your goals and instruments to invest in, your behavioural biases or habit of procrastination may derail your investment plan. Hence, it is recommended to make your investment automatic and use the systematic investment plan (SIP).

Refrain from checking portfolios too often: It has been observed that investors who look at their investments quite often tend to make decisions based on short-term performance, which may be detrimental to the overall performance of your investment. Therefore, it is advised that you should have a long-term view of your investment.