Are you a collector or an investor?

As said by The White Coast Investor, "A collector is someone who sees something they like, buys it, and places it on a shelf where it can be admired." He compares investment collectors to the collectors that go to flea markets or garage sales, sees something, buys it and puts it up on the shelf. However, this he says leads their houses into becoming a hodgepodge assortment of knick-knacks that at one point struck the collector's fancy. Similarly, when you are a collector instead of an investor, your portfolio becomes a mess.

Let's consider the example of the year August 2000 when Fortune Magazine churned the idea of a buy-and-forget portfolio for investors wanting to retire in 2010. They encouraged long term investors to invest in select ten stocks, assuring that these are good for them and will protect them from those recurring nightmares about the stocks that got away. But what happened over the next ten years?

All but one of the "stocks for the decade" not only lost money but also underperformed benchmarks. Just a single stock could outperform an appropriate benchmark while two went bankrupt and the average pick lost 31%. This was a classic example of how the media bombards us with 'must-have' recommendations. It is so easy to get influenced by expert predictions and the whims and fancies of numbers that claim to make you rich.

What then is the right way to look for investments and save oneself from being a collector? The key lies in your behavior. Carl Richards, author of 'The Behavior Gap' does an experiment where he asks people to mentally make a list of the things they want to spend their money on. Then compare it to the list of how they have actually been spending their money. The difference between the two is the 'behaviour gap' within values and actions that causes an over- or under-diversifying of investments. This is a classic behavioral mistake people tend to make.

Over-diversification occurs when you start becoming a collector of investments instead of merely being an investor. It would help if you started thinking of each investment as a thread in a larger tapestry. Avoid buying individual investments just because they have appeared with a blitz on the cover of a financial magazine. Doing so will lead to a series of ad-hoc investments, with no holistic strategy in place. Additionally, taxes and transaction costs that tag along with these investments, will impact your financial standing.

Similarly, avoid under-diversification that is caused by owning only a single stock or too much of one. Start buying investments for what they contribute to your overall portfolio and align with your goals. A successful investor is the one who has a logical investing strategy and can focus on the overall portfolio because, in the long run, that is more important than the individual investments.

It is crucial to always remember that you're not a collector but an investor. Invest in a way that helps you get you closer to the financial goals you've set for yourself. Always makes sure to have a balanced portfolio. Make goals the primary focus of your investments as they provide you with a clear path. The result should be a portfolio that will ensure that you will always have money when you need it rather than a collection of magazine covers. So, stop behaving like a Collector and start acting like an Investor.

The writer is CFA, founder, Happyness Factory