Would you say you are an efficient investor or an anxious one? Risk taker, stable or middle of the road kind of investor?
Your investment behaviour is important because it impacts the final outcome of your portfolio. An anxious investor is more likely to have a bad experience in risk assets and hence, pick only the more stable return products. While this keeps you calmer, you may be missing out on long term wealth creation.
To know how you measure up on the investing behaviour graph, see if you conform to behaviour aspects given below.
This is the biggest behaviour trap. We like to do what we already know, what our parents did and what our friends are doing. Being familiar makes us more comfortable. Indian families have indulged in real estate, gold and fixed deposit investing for generations; it has worked in certain periods. Hence, the assumption is that it will go on working in the years to come.
Simply put, if you have eaten a diet of dal, rice and vegetables all your life and remained healthy, as an adult too you will swear by the benefits of this simple vegetarian diet. A healthy adult in Italy will perhaps rave about a simple tomato-based pasta dish and its health benefits. Familiarity makes it easy to decide.
On the flip side you end up following the herd and becoming lazy. You hardly ever question what else out there is worth investing in or whether the age-old assets are indeed delivering growth as expected. It also prevents one from getting rid of older investments which have turned bad or are not performing conventionally.
In market linked investments like mutual funds, it can prevent you from selling the bad performers, simply because you have had them for a long time in your portfolio.
It’s a common trend to invest solely for the impending return. If real estate market is doing well, everyone wants to buy a second and third property. If equity is doing well, you will not want to sell, even though your portfolio risk could be high. Investments should not randomly follow return.
It’s a common trend to invest solely for the impending return. If real estate market is doing well, everyone wants to buy a second and third property. If equity is doing well, you will not want to sell, even though your portfolio risk could be high.
Investments should not randomly follow return. You may have invested when the asset market was doing well, but by the time you are ready to sell, things can look very different. Also, any return is a function of risk. Be sceptical about a promise of high return if you’re told there is no risk.
Instead, get wise and choose investments that fit your goal. Stay invested for long periods, look for flexibility, access to information, ability to redeem when you need the money and ability to grow your wealth. In investing, quick fixes rarely work out. Invest time and energy in understanding risk along with return.
This is a good habit you need to adopt. Regular investing lets you experience the entire market cycle in assets. If you just put lump sums every now and then, your experience will get defined by what happens to that chunk of money – which, in any growth asset can go up or down in the short term.
Being regular will also enable you to diversify because you will choose regularly where you want to invest. Diversifying your investments to a certain extent can help you reduce risk. Moreover, regular investing helps you save more and invest more towards wealth creation.
It's easier to talk about behaviour and harder to implement it. Knowing the behaviour traps is only the first step towards becoming an efficient investor. You need to then follow through either by self-discipline or with the help of a disciplined investment advisor.