Become An Unemotional Investor

Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.

Investing money judiciously is important as it not only allows investors to achieve different investment goals over varied time horizons but also ensures that they have sufficient financial resources at every stage of their lives. Of course, the investing process – that usually begins with identifying the most suitable asset classes as well as investment options and ends with completion of time horizon assigned to each of the investment goals – often throws up many challenges for investors. The extent of financial success that an investor can achieve largely depends upon how these challenges are tackled.

Although every investor knows that there are attendant risks of every investment made in different asset classes, not many recognise specific risks associated with each of their investments and their likely impact on the portfolios. No wonder they often end up taking haphazard decisions and put their financial future at risk. One of the biggest risks for investors is to allow emotions to influence their investment decisions. Although it is natural to get impacted when the market cycles depress the value of your portfolio, the key is how you react to them. The

only way to remain unaffected by such situations is to follow an investment strategy that makes you an unemotional investor. Remember, your best bet is to keep your focus on the investment strategy and build a portfolio that is suitable for your defined time horizon. Here is what you need to do to keep emotions out of your investment process:

Follow an Asset Allocation Strategy
An asset allocation strategy aims at spreading your money across different asset classes such as equity, debt, real estate and commodities. Asset allocation, if properly done, reduces portfolio risk more than it compromises returns. Simply put, if your portfolio has a mix of two investments that tend to go in opposite directions in different market situations, the combination has a stabilising effect on your portfolio. That’s because different asset classes perform differently in different market conditions.

For example, the stock market does well during an economic boom and loses ground during recessionary times. The bond market, however, goes in the opposite direction. While recessionary conditions are good for the bond markets, a booming economy is not so good for it. Make sure your investment strategy is flexible enough to accommodate the changes in your financial circumstances as well as the changes in the economic cycle. It is important because the economic environment has a direct impact on the behaviour of the financial markets.

Be Disciplined
A disciplined approach reduces the chances of any impulsive reaction to market movements. Besides, it allows you to benefit from ‘averaging’. While market volatility does impact your portfolio in the short term, the impact varies depending upon for how long the process has been continuing. Remember, the longer you continue investing in a disciplined manner, the lesser is the impact of volatility.

Balance Risk and Reward
Every investment option has attendant risks. Therefore, you must maintain a balance between risk and reward. To ensure this, the key is not to underestimate risk or overestimate returns. In other words, you must understand the potential and the risks associated with different asset classes in your portfolio. This helps in avoiding disappointments, and the consequent panic reactions that may derail your investment process.

Time Diversification
Remaining invested over different market cycles is another important aspect of investing. It helps in mitigating the risks that may emanate from any haphazard investment decision of either exiting from equities or reducing exposure in them at a bad time in the market cycle.

Don’t forget that falling markets often present great long-term buying opportunities. Of course, investing short-term money into equity or equity funds in the hope of making a quick buck can expose you to undue risks. Therefore, if you feel compelled to make a shift to your asset mix during turbulent markets, remember the reasons why you began investing in the first place.