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Monday, September 20, 2010

Avoid Emotional Investing Mistakes

If one sits down to chart the history of the Sensex over the last 30-40 years, one would notice that everytime there is a spike in the fortunes of the market, there is a corresponding spike in the number of people who want to turn ‘investor’. Unfortunately, we execute financial decisions based on our feelings and emotions rather than hard facts or financial planning.

The Sensex is a barometer of the economy’s sentiment. Its movements work in tandem with the way people think the country is going to perform. While people do treat trading in the stock markets as a way to make easy money, it is best left to those who want to trade on a daily basis. If you are one who cannot trace the movements of the Sensex continuously 24x7, then trading is not for you.

While we do endorse investing in the markets as a part of diversifying financial portfolio, we always recommend that before one begins investing in the stock market there should be a clear identification of the goals that accompany the move. How can you meet your goal if you are not sure where you are going?

When did you invest?

Most people think of investing only when the market starts moving upwards. While there are no figures to back this, during the last phase of bull markets, when the sensex peaked above 20,000, most people did not consider investing till the index has crossed 17,000-18,000. And when they planned to enter the market, seasoned investors were looking to start booking profits.

Who advised you on your investments?

Investing in stock markets involved understanding market fluctuations and impact of corporate actions on share price. More often than not, people start investing due to the trust that they place on their neighbour, friend, uncle or even the paanwala but not professionals who are trained to do the job. Just because someone mentions to you that it’s easy to make money in the Sensex right now, you decide to take the plunge – where it’s backed more by emotions rather than solid stock research & financial planning.

If we can for a moment step away from the mayhem and look at the market’s performance over the last three decades it might tell us a different story. In the long term, the Sensex has delivered average CAGR returns of close to 17.5-18%, which also beats the average inflation figures for the same period. In an analysis that we conducted, the returns from regular investing (or SIP) were better as compared to one time investing, over a longer period of time.