Posted On Thursday, Dec 29, 2011
While your plans for New Year’s eve would most probably include counting tequila shots and mixing martinis, when it comes to investing its best not to mix your emotions with the decisions you make.
Matters of the heart and matters of the wallet are best kept independent of each other. Hence Spontaneity may be a trait that suits the contestants of beauty pageants, but its definitely not a trait that works for the wise investor. So when you decide to make your investment decision, stay calm and focused. Have your goals outlined and be aware of the risks at play. Only when you figure these issues out, should you go ahead and take the plunge.
Most investors who have lost money in the markets would admit that the main cause of their failure was picking the wrong time to invest. And hence, never try to time the market. Instead use avenues like SIPs to average out your investments so that you make the most irrespective of market cycles.
If you spend some time in retrospection, you would agree that investments run in cycles. Things are never always up or always down. In a general scenario, when the markets start picking up after a decline, investors are optimistic and start buying. As markets mature, investors largely give in to greed and start hoarding. After markets reach a peak and start declining, fear takes over and investors start selling. Towards the bottom of this slump investors literally panic and start dumping their investments at whatever price they get, making losses and vowing never to invest in the markets again. But then, the markets start to move up again and investors feel disappointed at backing out so early. And the cycle continues yet again.
Following this trend is a sure way to lose your money to mayhem.
To invest wisely, remember that successful investors are often void of emotions. Though the key to their success lies in discipline.
Avoid being too optimistic, too enthusiastic, or too confident when making your investment decisions. Neither should you panic owing to any hype or forecasts of doom.
End this New Year with two reactions, “Stop and Limit”. Stop your heart from taking financial decisions and limit your head from feeling comfortable with the herd. We agree that there is comfort in knowing that you are a part of the group. But investment is not a sports team where you cheer with the group for your favourite player. Investment decisions are an individual choice. They have to be rational and logical. Look back at the worst investment mistakes you made. It is likely that you may have followed the herd at some time. For instance, listening to your friends advice and buying a heavily advertised fund even though its long term performance was questionable.
Bye Emotional Investing, Hello Sensible Investing.
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