Emotional investing is essentially letting emotions drive your investment decisions and letting your feelings get the better of you. You may end up entering the investment when the prices have already run due to a feeling of missing out. You may also end up exiting your investment early because of the lack of vision. Basically, emotional investing means letting your impulsive behavioural instincts take control of your investment decisions. Successful investing requires patience, discipline, and a clear understanding of your goals and risk tolerance.
Let your heart lead the way but let the mind follow
When you set out on a journey, you have a destination in mind that you want to reach. Financial goals are emotional decisions as they are linked to aspirations of a bigger home, good education for the kids, world tours with the family, a comfortable retired life and so on. When you let your head lead and your heart follow, you can make more informed decisions that will help you reach your financial goals. The goals are defined by the heart but the mind needs to be calm and balanced to realise them. You need a calm mind to set your financial goals, work out the amount of money and time needed to achieve them and the right scheme to invest in.
Neither anxiety nor euphoria can help
Getting rich quickly seldom works in real life. Euphoria may lead you to believe that the market only goes up and all investments can fetch handsome returns no matter when you enter which can be dangerous in investing. It is safer to follow a process as it might yield results in the long run. Maintain a balance between risk and growth. Always remember there is no place for impulsive decisions in investments. You are better off doing your homework thoroughly and making informed investment decisions. Similarly, anxiety doesn’t help much either as it will never let you hold your investments for the long term. Worrying too much may stop you from taking calculated risks while being overconfident can lead to wrong decisions. The emotional investor in you may end up buying in greed at high prices and selling in fear at low prices, neither of which can help in generating wealth.
You win some, you lose some. Don’t be afraid of losses.
There would be very few investors in the world who have never lost money. There are too many factors that drive the market and nobody can predict unexpected events. If you are investing in mutual funds, you must be prepared to take some risk since you are in the game with a hope to achieve good returns. You will have to take calculated risks if you wish to generate potential returns from your investments. Having a calm temperament that doesn’t get agitated by a few setbacks is essential for cutting out the emotion from investing. Cutting your losses in a bad investment and riding your profits in a good one are both signs of a balanced investor who makes well thought out decisions. Based on your risk appetite which is determined by your age, income and requirements, you can wisely choose schemes that may generate returns for you. Also, never keep all your investments in one asset class. It is important to have a diversified portfolio where you have a mix of debt and equity across different sectors. This would help you benefit from sectoral rotation on one hand and to tide over market volatility.
Never react to news in panic or greed
The internet and media are always filled with news which has the potential to impact your investment decisions. You must remember that most of the news is usually factored in the price. If you always react to the news, you may end up making losses because you may be a late entrant to the party. Here is where buying units of mutual fund schemes come in handy. Mutual funds are an excellent investment choice as they are managed by professional fund managers. They monitor and analyse the market and manage portfolios professionally leaving you with minimum scope for panic or greed to make wrong investment decisions. The first reaction to the news is driven by fear or greed and is never the right time to make a decision. Since it is driven by emotion, it can never be a sensible one and should be avoided. Most emotional investors get their timing wrong as they buy high because of greed and sell low because of fear.
Don’t be a copycat
The investment approach can differ from person to person and one size cannot fit all. It is best to have a personalised approach to investing. This would help you align your investments to match your risk profile and aspirations. Since your goals would be different from another, it would be incorrect to mirror another’s methods for your investments since their capital, goals and time horizon may be different. So stick to what works for you.
Don’t fall in love with your investments
If you have been invested in a scheme that has given you good returns, you don’t need to hold it forever. You should stay true to your plan and exit the scheme when it has peaked or it has served your purpose. If you fail to book your profits, you may miss an opportunity that may never return in the near future.
The past does not always indicate the future
Don’t make assumptions about the future based on what has taken place in the past. Every investment should be made based on current market reality and not on past performance. A particular scheme may have delivered poor returns in the past but that is no guarantee that the same scheme would deliver similar returns in the future. So, dwelling on the past will not help you in making prudent decisions as it would be based on emotion and not on reason.
Choosing your financial advisor wisely can keep your emotions in check
Planning your investments and executing them correctly requires some amount of knowledge and expertise. There is no need to worry if you are new to this and it overwhelms you. There are professionals in the Mutual Fund sector who can make these decisions for you. Investing through a trusted fund manager and letting him/her manage the funds is a prudent way of handling your investments without any stress.
Balancing emotions with reason is essential for making financially sound decisions. When you focus on facts and let the mind decide calmly, you are more likely to make a wise decision that you will not regret. You may still go wrong but at least you have followed the process which will make you a better investor over time. If you are the kind who gets stressed out by the roller-coaster market movements, you are better off trusting a fund manager who handles your funds carefully while you can reap the fruits of your patience in the long run. Go with a trusted AMC who may be able to deliver reasonable returns that can help you meet your goals. Stay calm. Take a deep breath and let the fund manager manage your money.
An investor education initiative by ICICI Prudential Mutual Fund
Visit www.icicipruamc.com/note to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website http://www.sebi.gov.in/intermediaries.html For any queries, complaints & grievance redressal, investors may reach out to the AMCs and/or Investor Relations Officers. Additionally, investors may also lodge complaints on https://scores.gov.in if they are unsatisfied with the resolutions given by AMCs. SCORES portal facilitates you to lodge your complaint online with SEBI and subsequently view its status.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.