Is COVID19 triggering these Behavioural Biases in you?
“Circumstances don’t make the man; they only reveal him to himself”, said the Greek Stoic Philosopher Epictetus. He may well have been referring to the way investors behave. It’s a well-known fact that each year, the infamous behavioural gap chips away at portfolio returns, leaving many investors wondering where all their returns went after so many years of ‘active management’! Buffeted mercilessly by the tumultuous waves of market volatility, investors tend to display a predictable sequence of behavioural biases that thwart their efforts at wealth creation. Here are three of them that COVID 19 has brought to the fore. Watch out!
The Conservatism Bias drives investors to stubbornly hang on to a pre-decided point of view, even though that viewpoint may warrant a re-think. Real Estate in 2010-2011 is a classic example. While indicators such as rampant over supply, high interest rates and massive stockpiles of unsold inventory pointed to an impending correction, real estate perma-bulls continued buying. The rest, as they say, is history! Cut to the present day. During the lockdown, stock markets witnessed one of their most brutal selloffs in history, with the NIFTY plunging to sub 7,500 levels. A lot of investors naturally became extremely negative at that point; many even exiting their investments at or near market lows. Since then, the economy has been unlocked and the government has shown a strong commitment to economic rehabilitation. Although we are far from being out of the woods yet, hanging on to this singularly bearish viewpoint in the face of strong evidence of an impending market recovery would be an avoidable mistake. Consider staggering your way back into equities over the next few months, in sync with your long-term goals and planned asset allocation. Apply the timeless wisdom of Keynes - when facts change, change your mind!
The Action Bias is the misplaced belief that doing something is always better than doing nothing. As was the case with most investors, you probably couldn’t react when the COVID 19 induced panic sunk the markets in March; and so, you sat helplessly on the side lines when the bearish wave struck with full force, dragging your hard-earned savings deep into the red for a while. Now, with your portfolio having recovered 25% or more from its March lows, you’ll be itching to take some sort of action on it. And while some adjustments may very well be warranted, it is highly advisable to not unnecessary churn your portfolio for the sake of it. Importantly, you must ensure that you keep your monthly SIP’s running like clockwork through these volatile times, in order to fully reap the long-term benefits of rupee cost averaging. Your investment plan should be based on your goals, time horizon, your risk appetite and resultantly – your target asset allocation. When markets get stormy, remember this: passivity works a whole lot better than hyperactivity. A qualified Financial Advisor can be extremely helpful in guiding you on a structured portfolio rebalancing exercise at this point.
Loss Aversion Bias
There’s an interesting fact that psychology studies (and anecdotal evidence) have thrown up over the years - the pain of losing a sum of money is twice as intense as the pleasure of gaining an equivalent sum of money. That’s why the loss-aversion bias kicks in firmly whenever portfolios slip into the red. This especially rings true for late entrants who are habitual trend-chasers – that is, investors who have the unfortunate knack for putting on their dancing shoes just as the party’s finishing! Here’s a recent example – when indices made all time highs in January this year, a number of well-intentioned first-time investors started SIP’s in equity funds. Three SIP tranches later, they were staring at heavy paper losses. The knee-jerk reaction to this would be to stop their SIP’s and shy away back to the haven of low return fixed deposits and pernicious LIC plans, without realising that this is an excellent time to accumulate equities at prices that are still well below their peak prices. So, keep your eyes on the prize and stay invested, without succumbing to the loss aversion bias!
A qualified Financial Advisor can serve as a behavioural coach to hand hold you through these volatile times. To connect with a Financial Advisor from India’s leading Financial Planning company, get in touch today!