Skip to main content

Personal Biases Investment Decisions

Best SIP Funds Online 


A good saving and investment plan and the intent to see it through may come undone if you let emotions dictate investment decisions

Personal biases may cloud your judgement when choosing the type of investments you make, how you select them, your response to market movements and your reactions to gains and losses and other important aspects of managing your portfolio. Here are some common biases that affect the decision-making process and financial security.

The halo effect

When you exhibit a willingness to act on investment advice—from your tax consultant, friends or others—without evaluating their credentials to give advice on markets and investments, you are exhibiting the halo effect or bias. This could lead you to prefer the mutual fund arm of a successful bank or insurance company—without evaluating its competence in the new business—over a proven mutual fund. This effect also comes into play when you make an investment decision based on news or recent events. This means, projecting your positive impression or perceptions of a person, company or product to all activities related to them, whether or not it is justified. This bias may translate into selecting wrong investment products and services that have no place in your plans, incorrect asset allocation that is not aligned to your goals and buying and selling decisions that are not dictated by your needs, such as: increasing your allocation to equity on the back of a bull run, or pulling out completely when markets crash, without reference to your own portfolio holdings and the demands of your goals.

Optimism and overconfidence

The optimism bias in financial matters manifests itself as a positive and upbeat outlook of how your future money matters are going to pan out. When such optimism is not supported by actions such as disciplined saving and investing for the goals or the performance of the investment portfolio, then it can be detrimental to your financial security, as it makes you underestimate the risks. For example, if you underestimate the expenses in retirement and believe that a small pension will be adequate, then by the time you accept the reality, it may be too late to rectify the situation.

Optimism may also beget over-confidence in how you manage your finances and you may believe that you have the Midas touch and anything that goes wrong is sheer bad luck and not a reflection on your skills or efficiency. Overconfidence leads you to take on higher levels of risks in your investment decisions. You may hold on to losing investments because you cannot accept that you made an error in selection. This impacts the long-term returns from your portfolio and consequently your ability to meet your goals.

Loss Aversion

While loss aversion is ingrained in all of us, when the primary driving force in making decisions related to money matters is the desire to avoid loss, even more that the potential gains possible, then you are exhibiting a behavioural bias of loss aversion. You may pay a steep price for this desire to protect yourself. The most common manifestation of this bias is holding your investible surpluses in low-return products that protect the absolute value of the capital invested and ignore the loss in real value over time with inflation and the risk to your goals. You may be jeopardizing your long-term goals as your portfolio's returns are sub-par because of your actions.

Another erroneous investment behaviour is to ignore flashing signs that an investment is a loser and needs to be cut out of your portfolio. On the other hand, you sell winning investments and book profits because you don't want a situation of the price going down and incurring losses. Over time, your portfolio may have more of losers as you sell off the winners.

Other detrimental emotional reaction is to hold on to an investment even when rational analysis tells you that you need to cut your losses. This bias may be exacerbated by over-confidence in your ability to forecast performance. Or, you only seek and use information that confirms your investment decisions and ignore any red flags. The most common of all biases that inhibit investment action is inertia. You take the easy way out and maintain status quo when decisions need to be taken on making investments, rebalancing, and others.

Decisions based on instincts can inhibit your investment success. Take a step back and ask yourself the basis for the decision. Unless it is backed by research-based facts and the move is aligned to your goals and their investment horizon, or for managing the risks in your portfolio, it is unwarranted and should be avoided.

Course Correction

Make annual goal check-ups an integral part of your financial plan. Look at hard numbers and then decide whether goals are on track and not merely on the basis of an optimistic outlook.

There are three steps to overcome this. First, acknowledge and recognise that these biases exist and how they may affect your decision-making process. Second, stop and ask yourself if an investment decision was an objective one based on factual data or an emotional response. And third, adopt disciplined strategies to emotion-proof your investment decisions.

Saving, investing and rebalancing the portfolio become objective when you have an asset allocation aligned to your investment horizon and risk and return preference. Other tools that will help keep emotional responses at bay include using systematic investment processes, rebalancing the portfolio to a schedule, having stop-loss rules to help initiate exit decisions, and quality control checks to review the performance of the portfolio. Taking professional advice is another way to keep your personal biases from impinging on your financial success.



SIPs are when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich

For further information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com

Popular posts from this blog

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...

Nifty F&O

  1. What is a straddle? A strategy using Nifty options usually before a major event or when one is uncertain of market direction. Comprises purchase of a Nifty call and put option of the same strike price. Usually strikes are purchased closer to the level of the underlying index. 2. What is better ­ buying or selling a straddle? It depends.Implied volatili ty of options, or near-term expectations of price swings in an un derlier like Nifty , usually peaks before an event and falls when the outcome plays out ­ like Infy re sults in past years. However, once the event plays out, a sharp rise or fall in Nifty could result in price of the straddle rising ­ benefiting buy ers. But, normally , those who sell or write options charge hefty premiums from buyers in the hope that fall in volatility would ensure the options end out-of-the-money, hurting buyers. 3. So, do straddle sellers end up winning most of the time? Yes. That's invariably the case when market volatility is trending on the...

JP Morgan launches Emerging Markets Opportunities Equity Offshore Fund

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 JP Morgan launches Emerging Markets Opportunities Equity Offshore Fund    The new fund offer opens for subscription on 16 th June and closes on 30 th June. JP Morgan Mutual Fund today announced the launch of its open end fund of fund called Emerging Markets Opportunities Equity Offshore Fund. The fund will invest in an aggressively managed portfolio of emerging market companies in the underlying fund - JPMorgan Funds - Emerging Markets Opportunities Fund, says a JP Morgan press release. Noriko Kuroki, Client Portfolio Manager, Global Emerging Markets Team (Singapore), JPMAM said, "Emerging markets have been out of favour for several years, as growth decelerated and earnings struggled. However, in a world of globalisation, we believe that EM will eventually re-couple with DM, leading to the long-aw...

Good time to invest in Infrastructure Funds

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Good time to invest in infrastructure The Sensex has gained almost 10 per cent from May 15 till date, while the CNX Infrastructure Index has gained almost 17 per cent in the period. The price to earnings ( P/ E) ratio of the BSE Sensex is 18.96; for the CNX Infrastructure Index, it is 24.57. The estimated P/ E for next year is 14.04 for the Sensex. Of the 24 companies that make up the CNX Infrastructure Index, six have a P/ E higher than 20. Does this mean infrastructure is fairly valued? Or, has it run up quite a bit? According to experts, barring stray companies, the infra sector is fairly valued and it is a good time to invest. Even if some companies are facing debt restructuring problems, once interest rates come down and regulatory norms become flexible, they will start giving good re...

UTI Equity Fund Invest Online

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   UTI Equity Fund   Invest Online UTI Equity is a large cap-oriented fund with assets under management worth Rs. 2,269 crore (as on June 30, 2013). The fund was originally launched in May 1992 as UTI Mastergain and is benchmarked against S&P BSE 100. A couple of years back the name of the fund was changed to UTI Equity Fund and many of the smaller funds of UTI were merged into this fund. Performance The fund has outperformed its benchmark as well as the equity diversified category average in the last one-, three- and five-year periods. It has repeated the same in 2013 (as on May 31). Since its inception the fund has delivered an impressive 26 per cent compounded annual growth rate which is superior to its benchmark performance in the same period. Y...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now