Daniel Kahneman, a Nobel Laurette for his work on the psychology of judgment, decision-making and behavioural economics, has put forth ‘’Principal of loss aversion”,which says people dislike losing money more than they like making it. People feel losses more deeply than gains of the same value. This is so true.
This is because money matters are emotional. In times of uncertainty, making the right investment decisions can be challenging. Here are the five most common mistakes people make when it comes to this area. Know them, and you’ll benefit immensely.
Deciding in Haste
The moment we see volatility and a dip in the value of our portfolio, we feel the need to react and quickly do something about it. Actually, the more prudent course of action is to first pause and understand, before you act.
Changing the course
Uncertainty leads to fear. Fear makes you change the plan. Over the years it has been proven that Equity is the best asset class in the long run, it makes little sense to change the plan because of short-term fluctuations.
This is one of the most damaging things that people resort to. When you stop investing monthly or weekly as per plan, you lose the opportunity to buy on dips and deny yourself the benefits of rupee cost averaging, the best way to ride market fluctuations.
Recent developments in our environment tend to guide our behaviour. When you see market rallies, you feel like investing more, and vice versa. This is a deeply-flawed and excessively emotional investment strategy.
Sudden change in Risk Appetite
They say, market correction is normalcy and linear market is anomaly. The inability to understand this leads to a change in risk appetite. This leads to knee-jerk reactions. The most sensible way to react to price movement is to take stock of your investments once per quarter.
Experience and research has shown that successful investments are a result of managing our own reactions and behaviours in the face of market movements better.
When we plant a seed, it takes time to stabilise, grow firmly, and bear fruit. Uprooting doesn’t result in growth. Similarly, constant checking, viewing of portfolio, and taking hasty action doesn’t help.
The bottom line
‘Be fearful when others are greedy and be greedy when others are fearful ‘ – Warren Buffett. In our experience, the decision to stay the course and invest in times of uncertainty has paid off more often than not.