Are These 6 Behavioural Biases Preventing You From Investing?   Aug 25, 2018


Robo2018

When life throws you lemons, make lemonade.

Possessing a ‘can-do’ attitude and being optimistic, is imperative to move forward in life.

We cannot allow the dark clouds of pessimism or an unpleasant experience pull us back.  We got to learn, evolve and move forward. Likewise, we cannot hold certain behavioural biases that could do ill to our financial health.

If you wish to make a fortune, nothing can prevent you except you. I have come across people who have some or the other reasons for not investing and engaging in financial planning.

But what they forget to recognise is, they’re jeopardising their long-term financial well-being and are allowing inflation to erode the purchasing power of their hard-earned money.

Some of the behavioural biases I’ve heard are:

  1. I don’t have the money

    Well, I would say, you can have the money to invest only if you use it wisely.

    If you’re are an impulsive purchaser who goes on a shopping spree and does not pay attention to budgets, maybe you’re enjoying all the materialistic gratifications today; but your financial future and vital financial goal viz. child’s education expense, retirement, etc. would be severely compromised.

    As Benjamin Franklin rightly said, ‘It is better to prevent habits than to break them’.
    You need to use your hard-earned money wisely by engaging in prudent budgeting exercise. Learn from the old adage: money saved, is money earned.

    “Do not save what is left after spending; instead spend what is left after saving.” – Warren Buffet

    [Read: 5 Steps to Build a Perfect Personal Finance Budget]

    [Also read: How to manage your household budget?]

    It’s only when you save hard-earned you can invest. There’s no point overleveraging or living on borrowed funds; because ultimately it pulls you into a debt-trap.

  2. I don’t know how to plan

    If you do not have the expertise, you should be learning or seeking help from professional financial planners.

    sfundportfolio

    If you wish to accomplish financial goals in life viz. buying a dream home, a car, provide for your child’s education expense, wedding expenses, travel abroad for leisure, your retirement, among other goals; prudent financial planning plays a crucial role.

    If you do not have a financial plan in place, you may not accomplish your financial goals.

    diver sify

    To build wealth and fulfil the envisioned financial goals you ought to invest regularly and with needed discipline. And believe me, opting for Systematic Investment Plans (SIPs)——a mode of investing in mutual funds——is one of the best ways to go about.

    [Read: All You Need To Know About SIPs]

  3. I don’t invest in stock markets

    Despite having heard of success stories other investors making money in the stock markets, I have come across individuals’ basing their decision on past experience of having lost money. You should get off this anchor bias right away! Learn from past experiences but move forward.

    Note that to create wealth in the long run, equity as an asset class plays an important role. If you invest wisely, it can compound wealth and can counter inflation effectively.

    [Read: The Good, Bad, And Ugly Of Inflation]

    If you do not invest in equities (stocks and/or equity mutual funds), you will regret in the long run, particularly during retirement.

    If you select the best mutual funds for your investment portfolio and make it a point to invest in Direct Plan of mutual funds you can generate appealing inflation-adjusted returns (also known as real rate of returns).

    Watch this video:


    At PersonalFN, we have developed a robust mutual fund research methodology. PersonalFN follows a S.M.A.R.T. score matrix:

    S – Systems and Processes

    M– Market Cycle Performance

    - Asset Management Style

    - Risk-Reward Ratios

    T - Performance Track Record

    PersonalFN’s stringent scoring model ensures the scheme is tested holistically.

    Personal’s flagship research service, FundSelect has 15+ years of impeccable track record. Click here to know more.

  4.  I don’t believe in asset allocation

    I have also come across individuals who invest all their savings in real estate. But real estate isn’t an appropriate liquid as an asset class compared to equities and certain fixed income instruments.

    Moreover, when you invest, it’s important to be smart and diversify. Asset allocation plays a pivotal role to strategize and reduce the risk of your investment portfolio in the journey of wealth creation.

    In simple terms, it refers to how much portion of your investible surplus should be allocated to various asset classes such as equity, fixed income, gold, and real estate.

    Personalised and prudent asset allocation plays a crucial role in optimising risk-adjusted returns.

    [Read: 5 reasons why asset allocation is important for your Financial Goals]

    [Also read: How a Smart Robo-Advisor Can Help You Chart Your Asset Allocation]

  5. I do my own research

    That’s a good thing, provided you are following a sensible approach with thorough due diligence. But if you’re not, then, you may not be on the right path of wealth creation.

    A comprehensive research and a need-based approach are essential to pick the best and suitable investment avenues. Do not follow the herd or blindly accept what is been said; there are chances of biased and mislead views.

    Even when you rely on external research reports, carefully ascertain their business model, whether work on commission or fee-based to know if the views expressed are independent and unbiased.

  6. I have a lot of time. Why think of investment planning now?

    Putting off things to another day, called procrastination, can be your biggest enemy. Every time you put off something for another day, you miss out on an opportunity of planning for a better tomorrow.

    Don’t neglect to invest or be lazy or assume that you are too young to invest.

    By delaying investments, you lose out on several years of wealth building. Time plays a vital role to help your money grow. If you start today, you’ll have a more time horizon to accomplish your financial goals and that can help you benefit from the power of compounding. To understand the effect of the power of compounding, let’s look at an example of two friends Mahesh and Umesh.

    Particulars Mahesh Umesh
    Starts investing at the age of 25 45
    Monthly savings (Rs.) 5000 15000
    Returns p.a (assumed) 12% 12%
    Investment till the age of 55 55
    Total Investment (Rs) 1,800,000 1,800,000
    Accumulated amount at Age 55 (Rs) 17,649,569 3,485,086
    (Source: PersonalFN Research)

    Disclaimer: The names and figures mentioned above are fictitious and used for illustration purpose only.

    As depicted in the table above, Umesh begins investing at a much later stage in life. He saves and invests more of course (3x compared to Mahesh), but still is unable to create a bigger corpus despite an equivalent rate of return clocked.  

    To cover up with the loss in time Umesh has two choices;

    • Earn 36.23% on his investment

    • Increase monthly savings to Rs 75,965

    Both these options are highly improbable for Umesh.

    Hence, the sooner you start, the better it is for wealth creation. So, make the most of it by investing now!

To conclude, break away from these behavioural biases before it’s too late. The sooner you make wise financial decisions, the closer you would move to financial freedom and be a successful investor.

Happy Investing!

Author: Aditi Murkute



Add Comments