Ways To Navigate Challenges Related To Investor Behaviour

By Praveen MGV, Managing Director, VGS Asset Distribution Private Limited

Praveen MGV, Managing Director, VGS Asset Distribution Private Limited

In finance, the terms "bear" and "bull" signify opposing market sentiments. A bear market symbolizes pessimism and a downward trend, while a bull market signifies optimism and an up trending market.

In bull markets, greed often takes hold as economic strength, optimism, and positive growth fuel increasing interest towards equities as an asset class. The upward trending stock prices fuel investor greed, leading to a desire for quick profits and the focus largely tends to be on short-term gains. Many view rising stock prices optimistically, anticipating further growth. However, as with any market cycle, there is a risk of eventual price decline or market consolidation, a phase during which investors who added equities at elevated prices may see significant value erosion.

On the other hand, in a bear market, fear is the dominant emotion as the overall market sentiment turns negative. Investors, in a bid to save their portfolio value or capital invested tend to sell in panic, further exacerbates the downward pressure on stock prices due to market's supply and demand dynamics.

To overcome these behavioural challenges, as investors, it is essential to maintain focus on disciplined investment strategies such as asset allocation as it enables an investor to navigate challenging times with ease.

As an investor what one needs to be mindful at all times is to avoid emotional decision making. This is because most of the impulsive decisions stems from one’s emotions. To help you in this journey, there are some broad frameworks one can adhere to. First, decide your investment objectives and accordingly chart out the asset allocation required as per your risk tolerance. Also, do not tinker with asset allocation basis the changing the market environment.

Once the allocation to various asset classes like equity, debt, commodities etc. is decided, chart out the investment plan. Here, tools like SIP (Systematic Investment Plan) and STP (Systematic Transfer Plan) tend to very helpful. Another important step in the investment journey, which often investors miss out on is to increase the SIP amount as the earnings improve. For this purpose, investor can consider the SIP Top-up option. This approach will ensure that one’s savings too rise in line with increase in income.

When investing in equity which is a volatile asset class, it is important to remember that when invested with a long term view, one gets to even out the impact of market fluctuations and benefit from the power of compounding. Remember, market movements are beyond our control, but our actions can be controlled and shaped up to ensure the best investment outcome.

At a time when equity market is trading at elevated valuations, making fresh equity investment, especially lump sum, should be done prudently. At such time, making staggered investment is the way to go. Here, one can use the STP feature. One may consider investing the lump sum amount in a debt scheme and then initiate a monthly STP in an equity scheme of one’s choice. This arrangement is a win-win for the investor.

In conclusion, understanding behavioral challenges and addressing the same through proper investment frameworks is an integral part of one’s investing journey. Stay disciplined, i.e. keeping emotions at bay, and maintain a long-term perspective, and over time, most of the financial goals can be comfortably achieved.