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Invest In SIP To Overcome Behavioural Biases

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Invest In SIP To Overcome Behavioural Biases
Deepika Asthana - 15 December 2019

Over longer periods of time, stock markets have generated good returns for investors. During the recent bull run, from the start of 2014 to the end of 2017, investors were happy and proud of their decision to start a Systematic Investment Plan (SIP). However, investors often second guess their decision to invest through SIP during volatile market conditions. When markets fall, investors often stop their SIP and look to invest a lump sum amount closer to market bottoms. However, timing the market is a challenging task even for the most seasoned investors.

People believe that they will be able to "ignore market noise" but usually end up “ignoring investment” by stopping their SIP. SIP is not only a way to invest money in the market but is also a tool that helps in enhancing investment performance.

Smoothen portfolio volatility

SIP ensures a fixed amount of investment is done periodically and consistently in a fund; this helps in averaging out the cost of purchase of the units in the fund. This follows a simple logic. When the markets are low, we end up buying more units and when the market is higher, we buy a lesser number of units. This reduces the overall cost of acquisition by averaging and smoothens the volatility.

Investment assurance

Waiting for the right time to invest sounds good, but it often fails to achieve the final goal of the investment. While waiting for the right time, we tend to lose sight of our investment needs often leading to the money saved for investing, flowing into the expense basket. SIP ensures that a small and regular contribution is made towards investment. This helps us invest continuously and achieve our financial goal.

Overcome recency bias

We tend to remember the recent past and give it a higher weight. When the markets are performing well, we become optimistic and invest more. In bear markets, pessimism takes over and we stop investing and sometimes we even exit our investment. This is against the spirit of investing “buy less at a high valuation and more at a low valuation”. SIP helps us by acquiring more when valuations become low and vice versa, thus keeping the spirit of investment intact.

Remove decision paralysis

Decision paralysis occurs when we are unable to make a choice between various options available, and end up not choosing any of the options. Initiating and continuing SIP in a fund that is aligned with our investment goal ensures that money is invested automatically. It saves us from the tough decision of choosing between investing and not investing according to the market situation, hence ensuring a continuous movement towards our goal.

We all must start and continue investing through SIP to achieve our investment goals. Reconsideration of SIP investment must be done only in two cases, if either the fund is consistently underperforming, or the objective of the fund has changed significantly. In such cases, we must realign our SIPs with our financial goal and keep investing until the goal is achieved. Stopping investment in volatile markets is unlikely to yield any benefit, and will only make our goal difficult to achieve.

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