Investing for the long term calls for an investor to keep certain emotions under check that could drive them to act recklessly; this would subsequently prove to be a hurdle to growth. By attempting to do so, it is possible for any investor to hold onto their investments while helping them to create wealth in the long run.
A few of the emotions that an investor should suitably try to control include:
Greed and fear: It is important to note that stock markets do not move up in a linear fashion. There is a high possibility that a sharp rally in the equity markets might cause greed to set in, leading an individual to overinvest. However, when there is a major correction, the psychology of fear might get triggered, leading one to frantically sell their investments. Both scenarios lead to a bad investment experience.
Solution: To escape this vicious cycle of emotions, a systematic investment plan (SIP) can be an effective route to invest in equity markets. The reason for this is that the investment amount can get automatically debited on a periodic basis, leading to higher investing discipline and avoiding mistiming the market.
Short-term thinking: This can make an investor lack the discipline to hold onto investments, thereby making them miss out on the power of compounding in the long term. This is because various news and events, domestic and global, drive the equity markets in the short term, leading to disproportionate profits or losses.
Solution: An investor should define their long-term financial goals and chalk out an investment plan with the help of a financial advisor. For staying disciplined, investing systematically through SIPs can help one cut through the noise and stay the course.
Availability bias: It is the human tendency to get influenced by events that come readily to the mind while making decisions. More often than not, most recalled events are unpleasant ones related to temporary loss of capital.
As a result, such events become more representative than they need to be while making financial decisions. The fear instilled on account of availability bias can cause an individual to be under-invested in equities in the overall asset allocation.
Solution: SIPs can help anyone to navigate through short-term market volatility, helping them to remain indifferent to various macroeconomic events and capturing the average effectively.
Herd mentality: Historically, there have been multiple instances, such as dot-com stocks during the late 1990s or credit default swaps during the run-up to the Global Financial Crisis in 2008, which have caused investors to jump in at the peak of a market cycle and exit with substantial losses.
Ironically, investors have been willing to take high levels of risk at a time when a market rally becomes overheated. On most of these occasions, the mistake of joining the herd could have proven costly for many investors.
Solution: Creating a financial plan is key. This can be done by taking the help of a financial advisor to ascertain the risk profile, define long-term goals, and form an ideal asset allocation as per one’s requirement. Following these basics can help an investor become relatively less prone to blindly following what others are doing.
Timing the markets: When investing in the equity markets, one tends to follow the strategy of ‘buy low and sell high’. However, since equity markets are volatile in the short run, it is difficult to predict the correct entry point. Furthermore, during such a time, waiting for the ‘right time’ can cause one to miss out on the power of compounding.
Solution: Since it is imperative to spend time in the markets, an investor can choose to deploy their money in a staggered manner through a systematic transfer plan (STP). They can invest the surplus money in debt funds, such as liquid or ultra-short-term funds, with an STP to periodically transfer to their desired equity schemes.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
