Emotion During Adversity, The Worst Investment Decision?

Akta Sehgal, the Founder and Principal Advisor for Manas Management Advisors gives us an important lesson in investment decision-making. 

Akta Sehgal, the Founder and Principal Advisor for Manas Management Advisors gives us an important lesson in investment decision-making. 

Warren Buffett says one of the biggest mistakes in investing is ‘doing stuff because you can, and not evaluating whether you should.’ What does this really mean?

Analysing investment behaviour

Most often we see investors coming in hordes when the market rises and does well and accumulating risky stocks. When markets turns in, there is a scramble to get out.

A similar situation happens when you need to invest your time to have a meaningful discussion with your financial advisor.

When the investment is done, all the investor is keen to know are there current and past returns.  What they forget to look at is the risk associated with it. In a bull or rising market, everyone is willing to take a high risk, even if their risk profile is conservative. Forget being a moderate risk taker!

The situation changes when the market takes a U-turn and becomes bearish or more volatile and he investor’s risk profile gets challenged and that gives them great discomfort. The returns are not there and in some cases, there is erosion of principal too. During such times, the investor has all the time to spend on knowing where the investment is, what the risk associated with it, is, and how they can learn more about it. At this point basically, we want to be a learner and just a return seeker.

Having experienced this for over 19 years of my experience in the financial industry, from Sensex at 3000 plus levels to 41,000 plus levels, I believe that the investor Psyche has not changed one bit.

The investor’s mistakes

Even the most learned investors make the same mistakes and fall in the trap of the mental biases that we have in our mind. We are over enthusiastic and high risk takers in a bull market and suddenly become risk averse in a falling or volatile market.

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The focus is always kept on what is not in our control rather than on what is in our control.

Our goals are succumbed to the pressure of our idiosyncrasies  and then we want to be mollycoddled for our own biases and mistakes.

As Behavioural Finance defies the fact that we are rational and neither is the financial market, we need to focus on the process and that in turn, could lead us to achieve our goals. We must spend enough time in planning our investments and internalising our goals to be able to have meaningful discussions with our advisor and other stake holders.

Happy investing!

This article can also be found here.

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