Jim is an easy-going 23-year-old. A fresher at his job, he is earning enough to support himself and a few outings a month. Being an avid Twitter user and after looking at people around him, he decides to start investing to secure his future. Belonging to the DIY generation, he does some serious Googling and settles on a diversified investment plan for himself.
His monthly investments starts to grow, rather quickly, since he started when the markets were in a boom phase. After 4 months, however, there was a difficult oil crisis plaguing the world, and the markets crashed. His portfolio turned red and he went into panic mode. Worrying about losing his money, he sold all his investments and settled for simple bank guaranteed certificates while some of his friends went on to retire being millionaires, just by investing in the stock markets.
Do you relate to this story and fear being Jim?
Don't worry! We have all been in Jim's place some or the other time in our investing journey.
The world seems unfair to us at such times, but let's take a step back and understand why this happens in the first place. These scientifically backed reasons offer a better perspective:
Why does this happen?
FOMO: Humans derive a feeling of belonging when they act like others around them. You must have (at least once) followed a stock tip as posted on a blog, Telegram/WhatsApp group, only to realize that it wasn’t accurate enough. This is the exact reason why everyone flocks to the markets when it’s a bull run and runs away when situations are bearish. We invest in companies because others are doing so, even if there is no sane enough logic to support it. Even seasoned investors have admitted that their guilty of this behavior sometimes.
Loss aversion bias: If you have booked profits early to ‘secure’ them, or held on to loss-making stocks in a hope that they will bounce back someday, you are guilty of this behavioral bias. A 5% loss would be much more heartbreaking for you compared to the happiness a 5% profit gives you. A classic rookie mistake.
Bad planning: Sometimes, you're wrong with the plan itself. A ‘Google it’ attitude can fool you into believing that you are the best judge for your investments. Avoiding the fees of an advisor can prove to do you more harm than good.
Here is what you should do, instead:
How to stick to your plan?
One size doesn’t fit all: The first step to achieving your investing goals is realizing that you need to create a portfolio, unique to your needs and constraints. Just like everyone has a different career, every person requires a different investing plan. A tailor-made plan having the characteristics of strategic asset allocation, diversification, and technical advantages ensures that it uniquely caters to your goals and constraints within an established time horizon. Copying and adhering to random stock recommendations are a strict no-no.
Understand the markets: Newton once quoted,
I can predict the movement of heavenly bodies, but not the madness of crowds.
Prices of stocks are slaves of demand and supply factors. People are often irrational and stock prices do not essentially reflect a company’s intrinsic value. Following the herd may lead you to buy overvalued stocks and sell undervalued ones.
This illustrates why 95% of the market players lose money. If you want to be in the top 5%, you have to do things differently, and stick to it.
Sometimes, your plan itself may be at fault…
Think of changing your plan
Some clear signals suggesting a faulty plan are:
Extreme volatility in gains and losses
A portfolio that moves against the market trends (losses during a booming market and gains during declining prices)
Loss-making portfolio despite the market trend
Not being able to achieve your investment goals within a predetermined time frame
If you identify with such a portfolio, it suggests that the drafting phase of your plan has gone faulty somewhere. An ideal portfolio should be able to achieve your goals within an established time horizon, respecting your obligations and constraints.
Ideally, it should be reviewed every 3-6 months, for changes in your goals or market environments.
An entire industry stands to give you investing and financial advice, consider investing in an advisor for a more professional approach.
Source: The Financial Literates
Also, a good way is to stay updated and learn about investing from blogs like ours, which would deliver weekly articles straight to your inbox.
It can be easy to lose your cool during volatile cycles of the market. Changing your strategy midway and falling prey to stock recommendations are tempting too. But emerging a winner, in the long run, requires a solid investment plan, a good advisor, minimum adjustments, and tremendous belief in your judgments.