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How to avoid investing emotionally in equity

A disciplined approach to investing can overcome emotions. Spell out your long-term financial goals and make a concrete investment plan to achieve it.

Market volatility brings forth a range of emotions among equity investors. When markets run up, there is a sense of excitement and euphoria among investors. And when it corrects, initial denial (a tendency to not recognize a loss and admit failure) gives way to fear and panic (See chart).


However, investing emotionally can sabotage financial goals – by making investors sell and buy stocks/MF units at the wrong time.

Take a mechanical approach. One approach is to invest equal amounts at regular pre-determined levels. This strategy works under all market conditions – letting you buy more units when the market is down and less of them when it is up. It eliminates the need to time the market.

Follow these few steps to control emotional factors in investing:

Make a Concrete Investment Plan

A disciplined approach to investing can overcome emotions. Spell out your long-term financial goals and make a concrete investment plan to achieve it. Then arrive at the asset allocation strategy – the allocation into equities, debt and cash – based on your understanding and ability.

Often, investors take more risk than is warranted. And it comes to the surface only when there is a market downturn. Understanding your risk tolerance and the risks in your investment portfolio could go a long way in avoiding emotional upheavals.

Rule-based Investing 

Take a mechanical approach. One approach is to invest equal amounts at regular pre-determined levels. This strategy works under all market conditions – letting you buy more units when the market is down and less of them when it is up. It eliminates the need to time the market.

Make it a point to diversify. One can diversify a portfolio across asset classes – as they tend to perform differently under varied economic conditions. Moreover, you can allocate money among different investments in each asset class. Diversification often reduces portfolio risk as seldom all stocks or sectors move in one direction.

Understand Market History

Understanding market history will go a long way in managing your expectations from it and curb any overreaction during a market downturn. In the short-term, equity markets go through bullish and bearish phases, making returns quite unpredictable. Over longer investment horizons, the likelihood of earning predictable returns is higher. For periods greater than 7-10 years, equities have time and again beaten other asset classes to give inflation-beating returns.

Stop Frequent Portfolio Tracking

If you are tracking your portfolio daily, chances are that you will see it go down 50% of the time. Stop falling prey to daily headlines and market noise. Deliberate over it and do your own research. While it’s crucial to stay abreast of the latest news, investors also shouldn’t overreact to it.

Takeaway

In short, market volatility tests the emotional fortitude of investors. A disciplined approach to investing is the best antidote to overcome emotions. Prepare an elaborate investment plan and stay the course through systematic investing and diversification. Tune-out the market noise and focus on the long haul. All this will ensure there is only one emotion left in you – happiness.

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