Equities Investments

Avoid investing emotionally in Equities

30 Oct 2019

In the securities markets, volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one per cent over a short period, it is called a "volatile" market. According to Warren Buffett, volatility is the friend of a long term investor - this does hold true because, in a correction, a long-term investor can invest additional funds at cheaper valuations, thereby increasing the potential returns in the long run. Market noise is generally always about the near term, while fundamentals hold true and manifest over the longer run.

Therefore, investing in the equity markets,by virtue of the inherently volatile nature of the markets, can either be a spectacular and rewarding journey or an extremely worrisome and emotionally-charged one.

It is observed that the typical investor tends to panic easily, seeing the slightest signs of volatility and market turbulence around him/her. There can be a range of emotions amongst equity investors due to such market volatility. Our emotions influence our decisions. It is vital, therefore, that we analyze how emotions impact investment decisions.

Emotions make investors sell or buy stocks/MF units at the wrong time (out of sheer panic or as a knee-jerk reaction which does not have a sound rationale), and this invariably results in sabotaging of their critical financial goals.

Following are a few recommended helpful steps to control emotional factors while making equity investments:

  • Make a concrete investment plan: You can easily overcome emotions if you have a disciplined approach towards investing. You should always make a solid investment plan to achieve your long term financial goals. Sometimes, investors take more or undue risks than what is warranted. You can avoid emotional upheavals for the long term by understanding your risk tolerance limits and the risks in your investment portfolio.
  • Rule-based investing: Disciplined investors actively use a set of proven rules that protect and guide them through the ups and downs of the stock market. Investing systematically at regular pre-determined levels works under all market conditions. It eliminates the need to time the market. Asset classes tend to perform differently under varied or diverse economic conditions, and thus one can diversify a portfolio across them. You can also allocate money among different investments within each asset class. Diversification often reduces the portfolio risk as seldom all stocks or sectors move in one direction only.
  • Manage your long term expectations: Long-term investments are vehicles that you can expect to pay off after holding them for several years. When investing for the long-term, you can be more aggressive because you have a longer time horizon, so you could opt to invest in a dynamic sector or fund to get a higher rate of return. This helps you to refrain from any over-reactions during a market downturn and manage your long term expectations. Equity markets go through bullish and bearish phases in the short term, making predicting returns extremely difficult. The likelihood of earning predictable profits is higher over longer investment horizons.
  • Stop frequent portfolio tracking: Do not fall into the trap of checking your portfolio too often, which is an open invitation to a lot of worries and fears. Check daily headlines and do your research. Although it is crucial to stay abreast of the latest news and events from around the world, investors should also not overreact to it.

Investing without emotion is easier said than done. Still, there are some crucial points to consider which can protect an individual investor from running after smaller gains or overselling in panic in anticipation of bad market conditions. Actively managing and monitoring a portfolio is essential for navigating the changing tides of the investment market. Still, for individual investors, it is critical to manage the behavioural impulses for buying and selling that can come with following the markets. Prepare an elaborate investment plan and stay the course through systematic investments and diversification.

Always remember that market volatility basically tests the emotional fortitude of investors. Conquer your emotions, and you will discover your investment journey to be that much more enjoyable.

Founded in 2005 by new–age entrepreneur Abhishek Bansal, the Abans Group has evolved into a globally diversified conglomerate, providing expertise in Broking Services, Non-Banking Financial Dealings, Financial Services, Agri-Commodity Services, Warehousing, Realty & Infrastructure, Gold Dore Refinery & Manufacturing, Trading in Metal Products, Pharmaceuticals, Software Development & Wealth Management. The Group is a comprehensive financial and non-financial services and solutions provider, aiming to provide end-to-end solutions to its clients.