Our entire childhood has gone hearing this phrase from our parents and elders—“Behave yourself…” Thanks to this stock phrase, most of the mannerisms, etiquettes and emotions that we display in public, are shaped by our desire to “prim and propah”. Basically, it is the behavior which controls our cognitive responses and emotions and overall personality. But imagine a day, your Financial Planner or your Mutual Fund Advisor calls & tell you to behave. We know that would be his final call, as you will end your business with him. But seriously, the financial behavior of most of us has not been shaped properly.
Let me elaborate with some live cases that we have faced in our career, to show how your behavior is important in managing your personal finance:
Mr Mudgal sold all his stocks including the blue chip stocks that he bought a week ago, on hearing the news of artillery firing between the two Korean countries.
Mr Gautam did not sell his stock 3 months before his daughter’s marriage when the markets topped. His answer was “not to take a decision to sell, is also a decision”.
Mr Paswan shifted all his mutual fund investments to liquid & stopped SIPs in March 2009
Let’s check if whole market participants think in same direction. See the graphic below. With the Sensex movement investor entered at wrong time. The maximum investments in equities were made by all of us in the FY 1999-2000 when the markets were high and touched 6000 and in the year 2002 when the markets were down at 3000 index, we were investing less in equity. Similarly, in FY 2008-09, when markets were going down, we literally made 25% of the investments as compared to 2007-08. But why do we blame market participants. It was us the investors who had signed forms and handed over cheques to the market participants.
And are mutual funds or passive investments, safe? Check below graph – When the nifty PE (Read: Sensex PE Ratio) increased, the sales increase simply shows that investor got carried away in the euphoria and as a result lost money. (Credit Principal AMC)
We all agree that the peace of mind is the most important thing when it comes to financial decisions. But the common behavioral blunders, makes for some sleepless nights.
The symptoms to identify the financial behavior errors are:
Overconfidence: if you ask, who manages better finances, man or woman? Lot of men will reply in favor of former. That is overconfidence. Same type of arguments goes when it comes to predicting markets or economy. People in their middle age are affected by this symptom to a large extent. “I did this” or “I started with Rs 1,000 in stocks” are the statements you get, when you speak to them. They would have no correct predictions but will have an “I knew it” kind of smugness to all things which go wrong in the investment space.
I follow – you follow: …my boss is very good when it comes to managing his finances. See him – he is so rich. So I do what he does. I invest where he invests. He is my financial mentor… now the poor subordinate fails to understand that two individuals will always have different goals, income, risk appetite and tolerance and time horizon. They think that all trains in the country ends at the capital. So just catch the fastest train available, to get there. This is herd mentality.
Herd mentality can also be explained with below grid. Normally when a person acts as member of the group he does not feel so bad in case the decision is a blunder. So basically this is under-confidence and failure to own up to decisions, which prompts him to display a herd’s behavior.
Fear of change: These people are smitten by past. Actually they are very risk averse. They have a very negative view about everything. They think that the markets are moving towards doomsday and any change in the momentum means… phew loss of capital. They forget that markets do not guarantee returns and capital either.
Fear of action: They have actually made bad decisions over money issues and now they think non-action is the best action. They wait for the other person to convince them so that in case of not achieving the desired results they can play the blame game.
Scandal sniffing: We feel this is a very dangerous symptom as these people are capable of changing individual decisions by possessing his mind. They talk things that would shatter the investor’s confidence. They would keep reminding you of the fact that “India is the land of corruption” and “market is place for scandals and not for investors”. They would constantly refer to the world history where the bubbles have burst and investors lost money. All wrong reasons are associated to justify “the forthcoming bear phase”.
Information overload: When you have too many options to act, you either take a wrong decision or postpone the decision. But the irony in markets is that you will always have many options. You just need to be aware of your requirements and follow a few basic rules of investing. (Read: 10 Investment Mistakes)
Warren Buffett says “Investing is not a game where the guy with the 160 IQ beats the 130 IQ… Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people onto trouble in investing”. So, to master the art of investing you need to control the urges and what if you cannot control them as changing basic behavior is a herculean task? Don’t worry. Then you have two easy guide ways- Diversification and Asset Allocation.
– this will change your response to the investment world.