Emotional investing is not just a beginner’s mistake, even seasoned investors fall into the trap of emotions. When you let emotions guide you towards the investment way, it is rarely a wise decision. Finances and money are amongst some of the most sensitive aspects of life. Inflated living standards and increasing aspirations have led people in the search of multiple sources of money, investing in mutual funds are one of the options. While looking for an alternate source of income is evident to everyone, what lies behind is generally an emotion. Hence it is very important to keep our behavior under check and not let it guide our investments. It is understandable that investments cannot be completely isolated from emotions and behavior but keeping a check on them can prove beneficial. There is no one-size-fits-all approach towards avoiding emotional investments but you can always try one method or the other in order to avoid it;
- Always have a long-term approach
The first thing to do while you are making your debut in the investment world is to have a clear vision of your long-term goals. Having a long-term goal(s) will help you in staying focused and any distractions that come your way due to market corrections or other requirements. If you don’t have a clear idea regarding your destination, it won’t matter much which way you choose.
This will help you to realize why actually you are investing. It can be your retirement plan or education fund or home down payment or anything, having a clear idea will always help you in investing better and sticking to it. The next thing you need to keep in mind is your investment horizon. If you still young (close to 30), you have got a lot of time to try out various options and simultaneously save for your retirement but if you are nearing your retirement then it is the time that you stabilize your folio and save eagerly for the retirement years.
Another factor that needs to be kept in mind is your ultimate life purpose. If you are someone who wishes to work till their body allows then whatever your age is, there is a long way to go but if you are amongst the other group of people who plan to retire early, there is a lot to be done.
Even if you are planning to retire at the normal age (58-62 years), you need to chalk out a plan for your living expenses and retirement years.
Once you are clear with your life goals, make sure you have them written on a piece of paper and kept safely. Do not forget to revisit this paper before you make any investments.
- Follow a balanced approach
Although the market we are talking about is quite a volatile one but such things need much more balance. Always have a balanced mindset before, while and after investing. Being overconfident about a particular fund or your decision may lead to over-investing which will most definitely carry the industry-specific risk. On the other hand, showing under-confidence will lead to minimal investments and an underperforming fund. Under-confidence is generally a trailing effect of bad past experience or limited information.
It is impossible to know everything about anything, there is always a scope of improvement but that should not create a bias in your approach towards the investments. In both the case, you may miss out on a remarkable opportunity.
This point may sound repetitive in most of our articles but that is the beauty of diversification. It can be used across different genres with different meanings, a complete diversification of the subject matter. Coming back to the portfolio, if yours is an appropriately diversified one, you need not worry much as it will prevent you from making any impulsive decisions. Correct asset allocation is the basis for your fund’s performance.
Look out for the most suitable diversification strategy and stay with it.
- Base your decisions on facts
Giving undesired heed to news and hear-say can lead to wrong decisions. Make sure you base your decisions on established facts and not on estimated news or information. There is plenty of historical data available in the market regarding mutual funds and investments which is very easy to access. Make the best use of it while you consider any fund for investment. Just because everyone is following a piece of news and behaving accordingly does not mean it is the right thing to do.
Be well-researched and stay updated but when it comes to finally make a decision on the ground zero, base it on facts and data.
- Do not treat stocks personally
We Indians are brought up with the notion that everything has feelings and that it hurts when we say or do bad things to it. If you have come to a stage of reading such articles, you would have realized by now that it is not true. Similarly holding attachment towards stocks does not make any sense. For example, if you are an investor in the cosmetics industry and there is a particular brand you always use, you will automatically feel attached towards it. The company’s good performance will make you happy and bad will make you sad irrespective of the fact you are an investor in it. This is not the right approach towards dealing with investments. It will only clutter up your mind and leave your confused when it would actually be the time to sell-off those funds.
Be pragmatic and observant of the fund’s performance and base your decisions on the facts and data you get at hand.
Happy Investor Rules!