Marzee Kerawala is a Certified Financial Planner with expertise in Income Tax and Investment products. Managing assets worth over Rs. 4 Billion, his firm ‘NiveshIndia’, designs Tailored Investment Strategy through Customised Financial Planning for individuals and NRIs, and also handles Treasury Management for corporates and SMEs. You can contact him at +91 9987567667 or Email: marzeek@niveshindia.co.in [Website is www.niveshindia.in]
Global markets, including India, had taken a significant beating following the outbreak of the Covid-19 pandemic. However, they have started picking up from their March 2020 lows. It is during these extremely volatile times, that most investors often make their biggest mistakes in the investing journey. In my upcoming articles, I will elaborate further on the ‘Behavioral Biases’ that investors often fall prey to, which impact long term wealth creation, with the aim of providing you simple yet effective methods to understand, learn and overcome these biases.
While an erosion in value of investments does cause worry, an investor is left with two options – 1. Can you control what is happening in the market? and 2. Can you control how you react to what is happening in the market? While the answer to the former question is ‘No’, answering ‘Yes’ to the second question, is easier said than done.
I have seen many brilliant financial advisors spending a lot of time researching market trends, sector analysis, understanding economic data, etc., so as to make an informed decision to invest the clients’ money profitably. While these are the prerequisites of making an investment, they are not the only aspects to focus on, nor are they the most important. It is most important to first understand the investor’s emotions. All investors possess a ‘Behavioural Bias’, and that is why it is crucial to address this issue to help them make informed investment decision.
In the current scenario, it’s the loss aversion bias that needs immediate attention. Loss aversion is a strong emotion, it is an expression of fear. As I had highlighted in my earlier column, the pain of loss is twice the joy of gain; it means the investors who are seeing negative returns in their portfolios have turned risk-averse and are shying away from equity markets, even though, historically, it has been proven that these are the best times to invest!
Listed below are the few examples of Loss Aversion bias.
- Investing solely in Fixed deposits or Govt. Bonds, even if it means negative real returns, post tax and inflation.
- Not selling a stock or a scheme only because it is lower than your purchase cost, even after it has reached a sell in your analysis.
- Focusing too much on a particular investment that has lost money, and ignoring other investments.
Let us understand this with help of an example. Your parents gifted an envelope containing Rs 1,000/- cash on your birthday. You were happy about it. While opening the envelope, you mistakenly cut the Rs. 500/- notes with the scissor, making them now defunct. So now, the net sum of money available with you is the same as before received the envelope. However, the emotional outcomes are different. Loss of Rs. 1000/- pained you more than the gain of Rs. 1000/-.
A similar experience is observed in investing:
Scenario 1. You Invested Rs. 1,00,000/- in a share and sold the share for Rs. 2,00,000/-
Scenario 2. You Invested Rs. 1,00,000/- in the same share; its value went up to a high of Rs. 2,50,000/- and the same is trading now at Rs. 2,00,000/- and when you sell it at Rs. 2,00,000/-, the pain from the notional loss of Rs. 50,000/- will be much more as compared to scenario 1.
You have to understand your bias and have to deal with it. The best way to do it is to free yourself of emotions as much as possible. Do not invest directly in volatile assets like equity without the help of a professional fund manager, if you don’t have a professional understanding. If you’re handling your own portfolio, adopt a portfolio approach and do not focus too much on individual stocks or schemes.
It is these ‘sticking to the basics’ approach which shield us from the urge to act frequently, to free ourselves from emotions while making decisions, and help us stay focused on the path of long-term wealth creation.
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