In our previous blog we covered the first 3 essential steps to overcome our biases and ensure our investment decisions are free from prejudice and financial pitfalls. Here, we cover the next 4 steps investors should follow through their investment journey to attain the best results.

What’s your strategy?

Do you have an investment strategy that helps you mitigate risks?

Every investor invests with specific objectives in mind. These could be savings for future expenses, taxation, retirement, wealth transfer or merely protection against uncertainties. Based on your requirements your strategy needs to align with the asset classes you decide to choose as a vehicle to invest in. Experts advise investors to follow a sequence while saving, here protection comes first. This refers to ensuring you are insured through a robust emergency corpus, insurances (health, term, general, etc.) and back up plans in case of break in income. Post protection, investors can then plan to invest and save for their goals. Taxation comes third in the sequence, followed by wealth transfer.

While for every investor the sequence may differ based on their goals and investment journey, nevertheless protection against risks must always top the list before your begin your investment journey. Investors tend to overestimate or underestimate the probabilities of their investment choices this subjective judgement is known as Risk Perception. Proper asset allocation that is aligned with your goals and risk appetite is key to saving prudently and saves you from any knee-jerk reactions stirred by strong risk-related emotions.

Cut through the noise

Do narratives influence your investing decisions?

Everything has a story behind it, so do marketing campaigns, the news and conversation between acquaintances. Do these narratives influence your actions and decision-making process? The slogan ‘Mutual Funds Sahi Hain’ is a classic example of a narrative being endorsed by celebs and cricketers which has proven to be an excellent awareness campaign that nudged Indian investors towards MF as an investment vehicle. While this may be a positive narrative, there are negative ones affecting your investment or asset allocation decisions?

 It is important to be well-informed and aware of your investments and the market at large. But, it is even more crucial to know what information is apt to your investment journey and what needs to be ignored. Your likeliness to base investment decisions on what information you consume is termed as Information Bias. Not all assets perform well simultaneously, the financial markets are cyclical in nature and every asset class has its own winning streak. An in-depth understanding of these market cycles can ensure you invest cautiously in assets that are well-diversified and match your investment goals.

Measure and monitor

What’s your benchmark for gain?

Goals that are measurable are attainable. Similarly, financial goals need to be monitored regularly to ensure your money is out to work fruitfully. How do you measure you benchmark gains from your investments? Consider the safest instrument you would invest in, let’s take for instance a fixed deposit. If you hadn’t to invest in the market you may have parked you income in FDs. The rate of interest you would have earned there is the minimum benchmark of gains you must make from your invested capital. But that is not all. Keep in mind inflation and taxation which eat into your savings as well, hence any gains post these two (tax brackets & goal based inflation such as education or medical expenses) must offer you returns over the benchmark to be profitable.

Discipline with competence

Do you have the discipline and competence to follow your investment plan?

Money decisions are influenced by our strong emotions and overconfidence can be one such bias that thwarts our investments. As human as we are, making decisions that are free from our biases can be nearly impossible. This is why even seasoned investors look towards professionals for their advice when it comes to money matters. A trustworthy financial advisor can be your north star, guiding you towards your goals and ensuring you stick to the path without any major diversions. Their competence combined with your discipline can ensure your investment journey is as frictionless as it can possibly be.

For more in-depth information here is our Masterclass webinar (ZKITBAG An Antidote to behavioural biases) that discusses these 7 steps in further detail.