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Dec 27, 2019 | Source: AxisDirect-O-Nomics
The views and opinions expressed are of Mr. Arun Thukral, MD & CEO, Axis Securities.
We all aspire to have sufficient financial resources at our disposal for a good life. To make this happen, we spend our adult years working hard, putting in long hours and occasionally trading family time to honor professional commitments. We all struggle, in our own ways, to make money, to secure our future financially. However, when it comes to making our money work as hard as we do, we tend to take it a little easy. What stops us from putting our money to work to elevate the quality of our life? The answer is simple – our attitude and behavior toward money management.
Financial choices that we make have long-term repercussions. However, our choices are often based on our past experiences or those of our friends and family. We tend to stick with decisions that yield good returns and avoid those that cause losses, seldom reviewing the reason behind the results. By forming strong notions about financial planning, we sometimes miss opportunities that can prove beneficial for us. Our mind, thus, plays a trick on us to hinder the wealth-creation process.
If you truly want to grow your money, ensure that you do not fall prey to these tendencies:
Ignorance
Ignorance is the root cause of sufferings. Lack of understating on our part leads us to make imprudent decisions, taking us further away from our goals. Investment and financial planning are no different to this rule. In the absence of knowledge about markets, investors refrain from adding the power of equity to their portfolios. False beliefs, like fixed income instruments are the best investment options, slows down the process of wealth accumulation. Similarly, relying on hearsay or friendly tips without due diligence cause more harm than good. It is therefore important to dedicate enough hours in research before committing your hard-earned money to an investment avenue. Thoroughly understand the available investment options, their nature, scope and rate of returns to make the right choice.
Ego
While ego has multiple facets to it, it is usually associated with arrogance, a term used to describe someone who thinks they are better than others. The ‘I know it all’ belief has led many investors in troubled waters. Ego is dangerous when it comes to investments because it breeds a false sense of superiority/bravado making investors believe that they have figured it all out. Inflated by ego, investors tend to believe that that they are better than others at selecting the right investment options and that they know the best time to enter or exit the markets. Such overconfidence makes an investor complacent and blind to market signals, facts and trends. A bloated ego also prevents investors from admitting a failure and pulling their money out from underperforming options at the right time. It is advisable to keep ego aside and seek guidance to make the right investment decisions. Studying to acquire knowledge and asking for help from experts when needed also keeps ego at bay.
Reluctance
If you are reluctant to open a door, you may never discover the riches that lie behind it. Reluctance to invest in certain sectors, asset class and, in few cases, reluctance to invest altogether limits the chances of building a fortune. While investors have a variety of reasons for this resistance, the fact remains that overcoming such aversions is essential to amass wealth. For instance, investors averse to equity as an asset class find it difficult to reach their financial goals in the absence of growth option in their portfolio. It is important for investors to analyze the underlying reasons for their reluctance and work towards overcoming them. If the resistance is due to some past experience, a viable strategy would be to opt for a staggered investment approach or SIPs. Investing regularly in small amounts is convenient and helps investors to ride the market ups and downs, making volatility a friend. Once the visible proof of growth starts to flow in, the inhibitions against such investment options start fading.
Attachment
As human beings, we often form an emotional attachment to what makes us feel secure. This tendency spills over in our financial life as well. There are investors who feel strongly about certain asset classes/specific sectors because they gained from those investments in the past. Staying invested in their chosen asset class/sector makes them feel assured about their investments. The attachment clouds their rational decision-making abilities and they do not realize that by holding on to such investments, they are losing out on better opportunities. As markets evolve constantly, investors must review their portfolio unbiasedly in the light of emerging trends. By ensuring that your investment decisions are guided solely by the latest data and not by an emotional attachment to what was a good investment in the past, you can grow your net worth significantly.
Fear
Fear always inhibits us from expanding our horizons. When it comes to investment, most investors fear losses and hence pick safety over rewards. They park their investments in fixed income assets that give them predictable and assured low returns instead of growth assets like equities. The fact that only 3-4% of the Indian domestic population invest in equity markets, in spite of superior returns, is largely due to this fear. However, participation in the equity market is imperative if you aim to create long-term wealth. Despite the cyclical ups and downs, equities have historically offered inflation-beating returns. To build long-term wealth, it is important to overcome fear and find ways to participate in equities more effectively. Invest in well-researched stocks which are validated by experts or leave your investments in the hands of professional financial planners.
There are multiple decisions that we make in our financial life instigated by our emotions. By keeping a check on our emotions and behavioral traits, we can avoid pitfalls and make the right investment decisions to ensure that our money works even when we don’t.
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AxisDirect-O-Nomics