Almost all investors swear to have definite financial goals that they would adhere to strictly. Notice a gap down in the market for a day or a week, and they all frets like a bag full of cats. Key investors around the world tell people what to do and what not to do. What you must not do ultimately defines your journey as your ability to refrain from succumbing to intermittent market downfalls saves you from unwarranted decision-making. Post Covid-19, this is the second time that the market has gone down deep red following Fed rate hikes to contain inflation and the imminent fear of inflation.
However, statistics also indicate that many domestic investors continue to make the most of this downfall by continuing with their systematic investments or parking lump sum money in value and growth stocks and mutual funds. The recent downtrend in the number of people signing up for new mutual funds or frantically pulling off their investments underscores how behavioural flaws mar many people’s intent to meet their financial goals.
Some common behavioural aspects that have destroyed more people’s wealth in the past include:
How is the market doing?
It is good to know how the markets are behaving but that must not equate to scrutinizing every market movement in detail. The tendency to interpret every small and big market movement has caused many investors to miss out on seeing the wood for the trees. Markets can go up and down for myriad reasons including recent geopolitical conflicts, unforeseen economic crises, natural calamities, and so on.
While volatility is inherent to the market, it has to go up in the long run. This is because share prices depend on the earnings of companies that are bound to rise with supportive economic policies and a restored, favourable business environment. Invariably, the continued fall of the market can etch deep wounds in the investors’ minds.
However, if you are to look at how the stock markets have behaved in the past 20 years, you will realize how the stock markets have earned returns despite having fallen more than five times in between. The earnings on the returns have not only managed to beat inflation but helped create a sound corpus for many. But, those who chose to pause or stop their investments following market downturns suffered the most as their pessimism caused them to lose out on substantial earnings and incur losses by parking money in fixed-income plans that promise security in return for low or zero volatility.
Timing the market
How many times have we overheard many investors saying, “I will deploy my extra cash only when I am sure that the markets have bottomed out.”? No matter how many times we hear personal finance analysts advising us to invest every month, many first-time investors wait for the market to drop down to their desired level only to realize their folly after the markets have risen.
The much-acclaimed stock market investor Warren Buffett once said, “It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” The crux of this man’s experience is that investors must check if they are buying stocks of profit-earning or cash-rich companies at the right valuation than wait to buy stocks of companies posting constantly fluctuating earnings.
As Peter Lynch famously said, “More money has been lost in trying to time the markets than lost in the market corrections”. Interrupting mutual fund investments or jumping from one to another without a clear financial goal in mind has led to losses for many in the long run.
Influenced by finfluencers
Barely a few weeks back, many finfluencers were busy giving their own versions of how the market would continue to tank under the effect of inflation. When the markets rose unexpectedly, the same finfluencers urged their followers “Do not short your stocks. Wait for the market to go up in the second half”. The markets did not behave as anticipated causing many intraday traders to lose their money.
The most common mistake that many first-time investors make is to fall for the free advice floating on social media handles of many finfluencers, especially Twitter, who survive on the vulnerability of their followers to garner more impressions and collect more followers in the process. What investors do not realize is that these social media handles are just digital avenues to voice one’s opinion.
Apart, these so-called finfluencers may either have a different risk appetite or are paid to push the prices of a certain stock by those involved in insider trading. Ignoring the well-meant advice of portfolio managers and advisors is something that has led many to lose out on their capital while also incurring unprecedented losses.
Investing is not gambling is an ultimate truth that many have consciously ignored in favour of quick profits and the lure to get rich within a short period. This greed has now led to an altogether different kind of scam in the market. Investors now rely more on tips shared by newly sprouted astrologers who share their views on the stocks using planetary configurations. The demand and dependence for such videos on YouTube are huge as is evident from the plethora of comments from alleged followers seeking further tips on how to deploy their money in the coming weeks.
This tendency has led to massive speculation by people who gamble away their hard-earned money on these alleged experts’ advice. Portfolio advisors’ counsel is largely ignored as investors, yearning to seek some action in their portfolios, seek cheap thrill with their stock market investments.
Investing all in one
If Buffett can, why not I? This mindset prompts many investors to park away their life’s earnings in the equity markets. The end result is utter confusion and chaos when the market goes down. Then there is a mad rush to take out the investments fearing further losses. While many investors know the various investment options available, not many are willing to diversify their investments. Diversification across various asset classes is crucial to earning returns from various sources implying that they continue to gain from other investments even when the equity market may not be performing.
For example, bond yields are inversely proportional to a rise in equity earnings. So, putting a part of your money in bonds will ensure earnings, albeit from a different source. Similarly, statistics underscore gold and silver prices shoot up during inflation and war-like situation, thus, hinting at the need to park some money in them too. Diversification is beyond investing in bonds and equities. Many people fail to broaden their investment horizon, thus, causing them to book losses after every few years.