The importance of investors learning from their mistakes
Reviewing your portfolio is an essential step in ensuring that you are on track to reach your goals.
An expression that we use a lot at Morningstar is that we are about the investor and not the investment. That means that any portfolio review needs to focus on you and your goals and not just the performance of each investment. Investing is supposed to help you achieve the life you want.
A large part of improving is learning lessons from your past mistakes, and reflecting on how you can do better in the future. This applies to investing, but also just to life in general.
Below, we highlight a few examples of the Morningstar teams’ self-reflection, lessons that they wish they knew earlier and a structure that can be put in place to help with reviewing whether you’re on track with your goals.
Self-reflection as a key to investing success, Mark LaMonica: Is the investing baggage you carry hampering your ability to achieve your goals?
I ignored Buffett's advice and it cost me, Joseph Taylor: Warren Buffett has three main criteria for buying a business but most investors only focus on two of them.
How I lost all my savings through a poor investment decision, Simonelle Mody: With first timers most at risk of poor investment decisions and the younger generation showing an increased interest in speculative stocks, I explore my biggest financial mistake and highlight what the most common errors are when it comes to investing for the first time.
Transitioning to a ‘grown up’ portfolio, Shani Jayamanne: What do you do when you have made investments in the past that you no longer believe in?
The dumbest investment mistake I've ever made, James Gruber: It's time for me to open up about my worst ever investment decision. Because it has lessons for all investors.
Structure for review
Have your personal goals and circumstances changed?
The largest input into an investment strategy or portfolio is your own personal circumstances or goals. We start our portfolio review process by looking at whether these circumstances have changes – such as salary, caring responsibilities for children or elderly parents, or any reason that you would have dipped into your emergency fund.
A change that a lot of investors would have experienced is a rise in expenses, and therefore savings rates. The ABS has shown that the household savings rate has dropped consistently since July 2021, from 19.3% to 3.7%. This dramatic drop has shown that the majority of Australians are struggling with saving. Your portfolio review may show that you need to replenish your cash savings and your safety buffer – your emergency fund.
Have your goals changed?
Now that we’ve gone through some preliminary checks lets move onto the big one – and that is goals. Goals are critical to any review of how your are doing because goals drive asset allocation decisions and security selection. Any portfolio review has to evaluate performance within the context of your goals. The question that you have to ask yourself is are your financial goals still valid, or have they changed? For example, you might have decided that you are going to retire 5 years earlier than expected. This new goalpost will require a reassessment of your investment strategy and your plan to achieve your goals.
How are you tracking against your goals?
Lastly, you assess how you are tracking against your goal based on the required rate of return for your portfolio. Depending on whether this has shifted and how long you have until your goal, it may require a change in asset allocation. Our first resource this week will go through the considerations of what may justify a change in asset allocation.
Resources to help with portfolio reviews
Turn your head and cough - our portfolio review episode of Investing Compass goes through the steps to conduct a review, including when you need to adjust your portfolio if you’re not on track.
Set yourself up for investing success with a detailed Investment Policy Statement (IPS). An IPS is a tool used by professional investors to ensure that they know the goals and objectives of their portfolio. Having a clear plan allows a reference point for portfolio reviews.