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

Axis Mutual Fund NFO - Axis Fixed Term Plan Series 18

Axis MF has announced that the NFO period of Axis Fixed Term Plan Series 18 (15 Months) under Axis Fixed Term Plan Series 17 19 has been preponded from February 27 to February 24.        --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.   Invest Tax Saving Mutual Funds Online Tax Saving Mutual Funds Online These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)   Download Tax Saving Mutual Fund Application Forms from all AMCs Download Tax Saving Mutual Fund Applications   These Application Forms can be used for buying regular mutual funds also   Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds ) HDFC TaxSaver ICICI Prudential Tax Plan DSP BlackRock Tax Saver Fund Birla Sun Life Tax Relief '96 Reliance Tax Saver (ELSS) Fund IDFC Tax Advantage (ELSS) Fund SBI Magnum Tax Gain Schem...

Budget 2014 Highlights for Saving

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   The new finance minister Arun Jaitley has just presented his first budget. What measures does the budget contain that will specifically impact savers and investors? Here they are: 1. Housing loans exemption for self-occupied properties increased to Rs2 lakh: Earlier this amount was Rs1.5 lakhs. This move barely keeps pace with the inflation in asset values.   2. Investment limit under 80 (C) increased to Rs1.5 lakh: This is a good move again and offers some relief to taxpayers.   3. IT exemption increased to Rs2.5 lakh, Rs3 lakh for senior citizens. This comes as a minor relief for taxpayers.   4. Annual PPF ceiling to be enhanced to Rs1.5 lakh, from Rs1 lakh: This is in tune with the change in 80C.   5. Long term capital gains tax for debt funds has been rai...

Franklin India Taxshield

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   This fund maintains a quality portfolio of large-cap orientation. The fund manager adheres to a bottom-up investment approach and looks for companies whose current market price does not reflect future growth prospects. Investments are in companies that can drive future earnings growth. Stocks are selected based on the company's financial strength, management's expertise, growth potential within the industry, and the industry's growth potential.   The portfolio is well-diversified across sectors and market capitalisation and follows a blend of value and growth style of investing. The fund follows a predominantly large-cap allocation of over 70 per cent, with small-cap allocation never exceeding 10 per cent since inception.   Performance The fund doesn't dev...

ELSS Funds for different Risk Profile

Match your Goals Risk Profile With ELSS Investment   DIFFERENT TRACKS Unlike funds with a clearly defined investment universe -- large-cap, mid-cap or multi-cap - Tax Saving Schemes do not specify investment focus If you are looking for an equity Linked Savings Scheme (ELSS) to pare your tax burden, the plethora of options may confuse you. Many investors simply opt for ELSS funds , also called tax saving schemes with the best return over a certain time period. However, this may not yield the best results. There are several types of ELSS funds and it requires a nuanced approach to pick the right one. DIFFERENT RISK PROFILES Unlike funds with a clearly defined investment universe -- large-cap, midcap or even multi-cap schemes in the ELSS category do not specify their investment focus. While these schemes have the flexibility to invest anywhere, most tend to follow a defined template. For instance, some funds take a distinct large-cap tilt with a limited exposure to mid or small-cap st...

Reliance Tax Saver Fund Online

Invest in Reliance Tax Saver Fund Online   ----------------------------------------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saving Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in india for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Franklin India TaxShield 4. ICICI Prudential Long Term Equity Fund 5. IDFC Tax Advantage (ELSS) Fund 6. Birla Sun Life Tax Relief 96 7. DSP BlackRock Tax Saver Fund 8. Reliance Tax Saver (ELSS) Fund 9. Religare Tax Plan 10. Birla Sun Life Tax Plan Invest in Best Performing 2016 Tax Saver Mutual Funds Online Invest Online Download Application Forms For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call --------------------------------------------- Leave your comment with mail ID and we will answer them OR You can write to us at PrajnaCapital [at] Gmail [dot] Com OR Leave a mis...
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