3 Ways Your Emotions Harm Investments
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It is difficult to separate emotions and logic when making crucial decisions. Investment decisions are no different. While there’s no harm in paying heed to your emotions, investors need to be careful about not letting them drive investments.
Panic selling, over-confidence in a particular asset class, falling for ponzi schemes are some of the instances of emotions ruling over investing fundamentals and resulting in poor decisions. Here are top three emotions you should keep under check to prevent them from harming your investments
There is an old saying on the Dalal Street that fear and greed are the two major emotions that drive the markets.
Fear triggers investors to exit market in panic during a downturn. As the market starts tanking, some investors sell their investments in an impulse to prevent any further losses. This is one of the greatest mistakes of investing as investors lose out on the opportunity of buying cheap when the markets are low.
The fear of losing money also prevents many from making investments in the markets. While there’s great degree of risk involved in equity investments, fear can make you risk too little and lose out on the opportunity of creating wealth in the long term.
On the other end of the spectrum, greed drives investors to pump more money into the markets when it surges. That’s a costly strategy as investors buy at an expensive price. Those investing through systematic investment plan (SIP) accumulate fewer units at a higher price.
Another form of greed is when fly by night investors looking to make a quick buck invest on trends. For instance, the brouhaha around the dotcom bubble in late 1990s drove investors to pump money in any internet-based company stock. This fuelled the market and lead to the bubble to burst in early 2000, resulting in a blood bath on the Dalal street.
Optimism is the belief that things will turn out well eventually. In investing, excessive optimism can drive people to stick to non-performing investments hoping that best is yet to come. This practice will not only erode the value of your investment but also make you keep investing more in that scheme. If an investment has consistently underperformed, take a one-time hit and exit instead of making further losses hoping that it will turn for the better.
Over confidence in a particular asset class also affects investment decisions. For instance, Indians consider real estate and gold as the best performing asset classes. However, data shows that gold as an investment has delivered a flat 5 per cent in the last five years. Returns from real estate, on the other hand, have largely stagnated and will continue to be so for the next three to five years.