We value our health very much. We go for a comprehensive medical check-up regularly. But, do we take care of our financial health in the same way? Do we have blind spots that are built into the way that we naturally think, akin to the blind spots in a car mirror?

Blind spots are follies that we should have known or should have realised or should have thought about, and which seem obvious in hindsight. It may be impossible to eradicate these blind spots, since they are embedded into the system. But, we can endeavour to minimise their influence. Here are a few tips.

Focus on process

The need to focus on process rather than on outcomes is critical in investing. In investing, outcomes are highly unstable because they involve an integral of time. One needs to judge an investment decision based on its quality at the time it was made, rather than judge it by the outcome. Having a financial plan and a process to implement it would enable us to maximise our potential to generate good longterm returns. Focusing on the process and its long-term benefits may not necessarily help you in the short term. There may be the pressure to change your process during sustained periods of under-performance.

Align investments to goals

Before investing, the questions you should ask are: What are these funds invested for?; what is the goal? This may sound simplistic, but the time frame of the goal determines investment allocation. To cite an example, prior to retirement, even if your portfolio is performing well, you may have to move certain part of your portfolio to fixed income funds as it would lend stability for your portfolio and help you meet your retirement needs.

Diversification

Risk means that more things can happen than will happen. We do not expect that our house will burn or car will meet with an accident, but it might. So we insure against the risk of fire or accident. We do not expect the stock in which we invest to decline in price, but it might. So, we do not put all our money into one stock. Diversification should be of the right kind and for the right reason.

A portfolio consisting of different mutual funds investing in the same universe of securities, governed by the same regulation and subject to the same market pressure like purchase, redemptions, etc, will have equivalent risk as that of investing in a single fund. That is a classical example of "1/n strategy" - dividing one's investments evenly across various investment options available. The proportion invested in each investment option depends on the number of choices available.

If there are three choices, say three new funds on offer, the investor will split his investments equally among the three choices. This is naive diversification. Depending on how the choices are structured, individuals can end up taking too little or excessive risk. For eg, if two income funds are on tap, people can invest/allot a proportionate percentage to income funds.