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Three ways to remove emotion from investing

Each individual will have their own solution to achieve this distance between emotion and decision, but there are some standard measures you can take to ensure a good start.

Human behaviour is governed by emotion in most events. When it comes to investing, letting emotions get the better of you is detrimental to your financial health. Although it’s a natural reaction, you have to try consciously to avoid a cloud of emotion in financial decision making. 

Each individual will have their own solution to achieve this distance between emotion and decision, but there are some standard measures you can take to ensure a good start.

1. Use asset allocation 

Asset allocation is the practice of splitting up your investments across basic assets like debt, equity, gold, and others based on your financial goals, time to goals and your risk profile. Strategic asset allocation is an early step in financial planning and ideally doesn’t need to be changed for a few years. As and when life situations change, for example, expansion of family or addition of large goals like buying a house, getting close to retirement, the strategic asset allocation can also change. Having a fixed allocation as a guide enables you to manage risk during the market frenzy and be better prepared in times of distress. 

2. Automate investing 

Whether you invest in mutual funds, stocks or gold there are options now to automate this process in a way that you don’t have to make that choice every time. Systematic investment plans or SIPs are the best way to take the decision making away from you and automate it each month or quarter or week whatever frequency suits you.

You can pick a time frame until your financial goal and keep the SIP running. Revisit at times when your income situation changes or the underlying fund or security has had changes. Other than that, investments keep happening regardless of how you are feeling about the market. 

Frequently looking at the portfolio value can make you elated or deflated depending on the market situation. In most situations, the long-term portion of your portfolio should remain untouched despite market volatility.

3. Avoid frequent portfolio visits 

An important behaviour change and emotion control mechanism is to avoid looking at your portfolio too frequently. Try to automate this activity as well and revisit only during sharp shifts in the market, or when your income status changes or if the state of the securities you invest in change and lastly, if you have reached one or more financial goal you set-out for.

Frequently looking at the portfolio value can make you elated or deflated depending on the market situation. In most situations, the long-term portion of your portfolio should remain untouched despite market volatility. If you aren’t looking at the portfolio value too often, you will be less tempted to act only on market sentiment and immediate emotion. 

Investment return is less about the fund manager and more about your own behaviour in handling your investments. The key is to be objective; don’t only go for what is familiar, don’t attach yourself to the manager and certainly don’t start to favour one brand or product over others. Be objective, less emotional and invest wisely.

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