It is surprising to know that even the most seasoned investors are susceptible to investment blunders that arise from irrational reactions and emotional decision-making. Research has proven the gap between investor and investment returns tends to be as wide as 3% pa.

Why this wide gap?
Why are investors losing out?

Managing Emotions

What can you do to ensure your emotions are in check and do not erode our gains?

When a lot is at stake, financial loss or gain, even the thought of it can stir up a whirlwind of emotions that could hamper your decision process. Fear or greed takes over our capability to make rational choices and we act depending on our biases. Loss aversion, herd mentality, familiarity bias are some of them that kick in causing knee-jerk reactions that may or may not give you the desired results. This emotionally chaotic situation should be avoided while making any financial decision. Keeping your emotions in check is a priority for any decision-making process, be it financial or otherwise. Investors who calmly assess their investment opportunities and their implications are far more likely to benefit from them.

What’s your plan?

Planning is a vital part of investing, failing which investors are likely to invest in instruments that fail to align with their financial needs. Such investments will attract equally unplanned decisions. Let’s take a hypothetical situation of an investor who has set aside 30% of his corpus in the equity market, a step taken without mapping his corpus to any specific goal. Sudden volatility in the market begins which reflects negatively in his overall portfolio. Looking at the notional losses in his monthly statements, listening to negative sentiments of a possible market drop ahead, and finally following the herd he decides to cut his losses. His fear and herd mentality turned his notional loss into actual losses. Only if he had mapped his investment to a specific goal, say retirement fund, he would have been aware of the timeline needed for these investments to mature giving him the peace of mind that markets would eventually bounce back in the long-term securing his investments.

Mapping investments to financial goals keeps you aware of the timeline you have to invest and the appropriate risks you could possibly take on the specific investment. This process lets you make decisions that are reflective, logical, and (in some proportion) void of certain biases.

Insight and foresight

‘Know your investments’ – Not all of us have the time and energy to spend understanding the financial markets in-depth. To decipher the best investments some may choose to spend the time studying opportunities while others may choose to let expert financial advisors assist them through their journey. Whichever route you choose as an investor, one must always be aware of the underlying investments you have invested in. Seek opinions that contradict your investing theories, this can assist you to avoid confirmation bias helping you evaluate your investment decisions thoroughly. Avoid chasing performance, cause no single asset can perform consistently through market cycles. Yesterday’s winners could be tomorrow’s laggards. Ensure you stick to your investment strategy and within your risk appetite limits. This will ensure you are in control of your investing journey and will reduce the noise around you controlling your knee-jerk reactions in investment decisions.

While these are a few pointers on overcoming behavioral biases we intend to dive deeper into further understanding our biases and build a defence strategy that consciously helps us avoid investment pitfalls.

Join us for the webinar:

Topic: Z-K.I.T B.A.G. – An Antidote to behavioural biases in volatile markets
Speaker: Mr. Ajit Menon, CEO of PGIM India Mutual Fund Pvt. Ltd.
Date: 30th April 2021
Time: 05:00 PM IST

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