Reported By:
| Edited By: Tanwir Alam |Source: DNA |Updated: Oct 10, 2018, 06:45 AM IST
Most investors are aware it is time in the market that is important and not timing the market. It makes sense to buy when the market trades at lower valuation and sell when it is high and avoid panic selling. Yet most often we end up doing the reverse. Time and again most investors fail to avoid the same mistake.
Investing involves two parts of the brain – logical & emotional; both diametrically opposite. Investment decision-making is not governed entirely by profit and loss. The perceived gains or losses trigger biological changes in the brain and, in turn, affect our actual investment choices.
The uncertainty that surrounds the current market conditions globally are oil trading at $83/barrel which will impact India's current account deficit and input costs; US-China trade war issues which can have an adverse impact on global markets and the US Fed rate increase which will drive both and equity money back to USA.
Similarly, domestic uncertainties include the depreciating rupee to dollar which is a concern because we are primarily heavy on imports; the widening trade deficit leading to a weak macro; and the uneven geographical distribution of the monsoon, which was marginally lower by 9%. This could affect rural consumption and lead to reduced festive season sales.
These uncertainties are like the horror movies, where you don't know what is going to happen next. The fear of losing money or the belief that you might lose money is triggered and processed in the same part of the brain that deals with death and mortality. This intuitive part is activated on seeing any kind of danger or threat. People react emotionally when the market is volatile. The euphoria of the bull run makes investors greedy, completely ignoring the risk. The same investors fail to see optimism during a bearish phase.
The falling market, the negative news and the reduced market value of the portfolio are causes of concern. Some investors would have already sold fearing further losses; and some are bound to ask questions like these:
Market never destroys wealth. Most often it is either the ill-application of financial products and the impulsive emotional reaction to such market volatility that are the root causes of all wealth destruction. Volatility stems from uncertainty.
Pause and take a deep breath and answer the following questions:
Has this happened for the first time? If you really study the BSE SENSEX movement over the last 20 years, you will notice these highs & lows are part & parcel of equity market investing.
What is your main reason or goal for investing? Majority of those who invest without a specific goal are more likely to struggle to hold on to their investments in bad market conditions. If you have picked equity investments for long-term goals, you must stick with them. Continue you SIP investments and ride through the lows to emerge as a winner.
The difference between average returns generated by most investors and those of the market can be attributed to investors' emotional blunders, denoted as Behaviour Gap. It requires more than just financial knowledge to overcome this trait.
The writer is founder and CEO, FINCART
