One of my clients called me sounding grave concerns about market volatility. He was of the opinion that he should have withdrawn the money invested in equities when markets were at the top. However, he was not willing to understand that he is talking about the actions of past in future. In a nutshell, he was in a disturbed state of mind in context to his investments in the markets. Investing Emotions are the biggest enemy of a good investment.
Human beings are emotional creatures. They get emotional about things close to their heart. Money is one ‘prominent’ among them. We know that one can not take ‘practical decision’ being in an emotional state of mind.
Suppose you decide to run a marathon. You prepare well, despite the fact that there are chances you will face some injuries and aches. Chances are that you lose the race. However, if you would have anticipated the injuries and failures and prepare for that as well, the impact of variation from the expected is much lesser.
You are looking for start or a shift in career. You have started facing the interviews. But you are not able to clear the interviews in spite of the preparations. Would you rather decide not to attempt the interviews in anticipation of a failure?
For instance, you move out of the home and it starts raining. You are not prepared for the rains. What do you need to do? Either plan, be prepared for the rains in advance and then move out. Or if you are not prepared then face the rains. But it does not mean that you will not move out when it is raining the next time.
Hurdles are a part of life. ‘More the hurdles’, ‘Great is the Life’. Dead bodies don’t face hurdles.
One has to think logically to take a practical decision. So to take practical decisions based on numbers and facts one need to keep the emotions away. If you are prepared well in advance, if you have anticipated the ‘bumps’ on the way, the anxiety during the journey would be much lesser and you might continue towards the destination fearlessly.
So what’s the solution. For not being emotional about money/investments and to keep aside the investing emotions one needs to learn to stay away from the factors causing anxiety. Here is a 6- point action plan to manage Investing Emotions.
6-Point Action Plan
- Prepare well – You need to prepare well for every investment by asking questions like- why are you investing, when do you need this money back, what financial goal do you expect this investment to provide for, what are the expectations from this investment.
- Anticipate the worst – You need to first understand what is the worst thing that can happen with this investment, once you know this be prepared for the same. Also, try to manage the worst with the help of methods like a hedge or right asset allocation.
- Understand your Risk Profile – Investment Advisors / Financial Planners use different methods to help you understand your ‘Risk Profile’. With your risk profile, you understand Your thought process to take the risk, your preparedness and affordability to take the risk.
- Avoid overflow of information – Advent of technology gave us mobile, internet, TV, newspapers and day in day out seminars on investment. Shut yourself from this overflow of information. Stick to your objective.
- Focus on destination, not the process – Do a meticulous goal planning before deciding the investment. Review your investments intermittently, but stay with your investment until the time the goal is achieved.
- Get the consultation – Hire a good advisor to take forward your investment decisions. An advisors job is to plan and manage your investments and risk therein. However, advisors do have a bigger job, to manage Investor’s Emotions and handhold them psychologically during the times of volatility.
At Bonvista Financial Planners we follow the 6 point action plan above which helps our client reach their money goals.