Equity investing is a long-term game, you must wait for it to yield returns instead of fearing loss
There are 2,153 billionaires in the world, and together they hold more wealth than 60 per cent of the world’s population. The secret to their wealth? Business ownership and equity!
For Indian investors too, equity is one of the most rewarding asset classes today - especially given the potential for business growth in India in the next few decades. Yet, less than10 per cent of household savings in India are invested in it. And those who do invest in equity often find their “fingers burnt.”
Contrary to popular belief, making money is less about financial acumen and more about the money mindset. There are deep-seated beliefs and even evolutionary conditioning at play when it comes to building wealth. This cognitive conditioning makes it difficult for you to invest profitably in the equity markets. Let’s look at some of these mindsets that are holding you back.
Survival instinct: Stuck in the here and now
What if I told you that the very thing that makes you who you are is stopping you from building wealth? Absurd, right? However, it is closer to the truth than you’d imagine! The cornerstone of human evolution, our survival instinct, is the greatest hurdle to long-term wealth building.
Survival instinct has been coded into us for thousands of years, whereas stock markets are a very recent phenomenon. Survival instinct is what urges us to protect our interests here and now, and we want to withdraw from equities when markets tank. Yet equity investing is a long-term game. You must wait for it to yield returns. So, all the time your biology is warring with your logic!
Fear and Greed: Emotions rule over facts
We often approach money with two ruling emotions—Fear and Greed. In stock markets, logic dictates, “Buy Low, Sell High.” However, when the market is at its peak, we hear stories of “overnight riches”. Greed takes over, and more people buy up stocks. Soon, the markets enter a self-correcting phase. New tales of financial losses surface. Fear sets in. And just when the time is ripe to buy or stay invested, everyone starts selling. You let emotions and herd mentality rule over fact and logic. The fear-driven behaviour was very evident in the recent Covid-19 led market crash.
Loss aversion: Sticking to safety
Psychologically, we operate from a principle of “loss aversion.” The fear of losing a rupee is greater than the pleasure of gaining two rupees. This is why most people invest in supposedly “safe” assured return assets. Assured security, even if minimal, is preferred over the perceived risk of loss that is associated with equity investing.
Tangible vs. Intangible Assets
A rupee in hand feels better than ten in the bank. That’s because of its tangibility. You can see it, feel it, it’s right there! Tangible assets like gold, real estate, etc. feel more “real”. Moreover, their visibility makes them seem steady—you don’t see their volatility in action. In contrast, equities are intangible. It’s just a notion and a number. Plus, their volatility is too visible as that number changes quickly.
Getting into the 1 per cent Mindset
How can you overcome these biases and invest in equity to leverage the India opportunity? Here are some things that can help:
Be clear on your financial goals: Consciously making a long-term plan and reminding yourself to act on it regularly will help tone down short-term jitters.
Take a less volatile approach to equity investing: Instead of diving head-first into stock markets and day trading, invest in equity mutual funds. Experienced fund managers, with humongous analysis machinery at their disposal, can make better-investing decisions yielding better returns.
Give your logical brain time to kick in: Don’t make investment decisions based on an emotional impulse. Take some time to pause and revisit the decision. Write down a pro-con list somewhere. Talk to an investment professional. Be aware of what your decision is driven by.
Do a fact check: Don’t make equity investments based on market hype - something we saw in action with the recent Zomato IPO. Take time to evaluate the viability of the companies you are investing in. However, in my opinion, the best option to get the most out of equity markets is through mutual funds.
Evaluate the opportunity cost: When choosing to invest your money, analyse the opportunity cost. For example, if you want to buy real estate, what are the returns it will fetch you over 5-10 years vs. if you put that money in equity.
Make equity investing a discipline: Start a SIP in equity mutual funds. That takes away your need to track the markets daily and also averages out the cost in the long run. Plus, a disciplined approach will make it second nature.
Evaluate performance over longer periods: When you buy a house, you don’t evaluate its value daily, right? Do the same with equity. Once you have invested in equity mutual funds, don’t track them daily. Wait 6-12 months to see how they have performed.
Finally, it is important to remember that money is just a means to an end and not the end itself. Treat Money like a tool to get the experiences you want in life. If your mindset is that happiness is hitting a certain number saved in the bank, you will miss out on everything else that could have brought you joy and contentment. After all, it is the experiences, and not ‘things', that are the key to happiness, and it would do us well to remember that.
The author is an investment professional and author of the book, ‘SimplyMutual: the 1 per cent formula to gain your financial freedom’.
DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.