Equity market valuations are at an all-time high in the midst of a raging Covid 19 Pandemic. Global Debt is also at an all-time high and interest rates are at an all-time low. The human race was witness to such a pandemic about 100 years ago. Some experts feel markets are irrational. Emotions are driving all our decisions including the ones related to investments.
But as per experts, Emotion is a great enemy when it comes to investing. Human emotions inspire us to do the wrong things at the wrong time.
When things go well, majority of the investors get excited and make money in the security markets, they are encouraged by the developments in the economy and they continue buying till they either run out of cash or the market cycle turns. The more prices rise, the more they buy. As things go downhill, there is bad news, people get worried and they sell. The lower the things go, the more they sell.
Currently, the Indian economy is going through tough times, however equity markets continue to look up as equity markets by nature are forward-looking and investors expect that we would be able to overcome the current situation through Vaccinations (taking cue from the current situation in China and US). A good earning season has also been a great positive for the market.
What worries me is the rising participation of individual investors in the capital markets. As per NSE: “The share of individual client participation has steadily increased from 33% in FY 2016 to 45% in FY 2021”. It claims to have added nearly 90 lakh, new investors, during the financial year 2021.
Source: NSE
Some of them are first-time investors, who are yet to experience any major jolts in the market since the last one year, thanks to the amazing recovery we saw since April 2020. Any deep corrections can shudder their confidence and interest from the markets forever. Hence, it is important that they continuously improve their understanding of the market dynamics and take well-informed decisions once we see deep corrections.
Markets are a true reflection of our life and there will always be ups and downs. There will always be gains and losses.
It is pertinent to realize that “Losses loom larger than gains” meaning that people by nature are aversive to losses. Loss aversion gets stronger as the stakes of a gamble or choice grow larger. It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gaining.
We need to get control over our emotions while investing specially when we see Euphoria in the market it is time to turn cautious and when we panic, it is time to turn aggressive.
Warren Buffet once said: “ You will continue to suffer if you have an emotional reaction to everything that is said to you. True power is sitting back and observing things with logic. True power is restraint. If words control you that means everyone else can control you. Breathe and allow things to pass.”
Investing without emotion is easier said than done, but there are some important considerations that can keep an individual investor from chasing futile gains or overselling in panic. Understanding your own risk tolerance and the risks of your investments can be an important basis for rational decisions.
Every individual has a unique willingness and ability to take risks depending on his current situation in life. What may be the right investment decision for your friend may be completely wrong for you. Any investment decision which makes you lose your night’s sleep is not the right decision for you.
Following a well-defined investment strategy and staying the course through market volatility often yields the best long term benefits. Emotional Control is the key to successful investing.
Namrata Singh is Certified Financial Planner with more than 13 years of experience in banking and wealth management. Views are personal.
