Moneycontrol
Sep 23, 2016 05:13 PM IST | Source: Moneycontrol.com

Why fear is good when it comes to investing

If you learn to live with fear, you can do much better as an investor.

Shweta Jain
International Money Matters

Run Forrest run! is the famous line from the movie- Forrest Gump where he’s told to run away from trouble and not to be brave. Survival is not of the fittest, but of the ones who adapt to change. So, while facing your fears may generally be a good idea, in investing, fear isn’t all that bad. Accepting it and learning from it is better than just facing it. Embrace your fear and channelize it to make it work for you. How do you do that?

1.    Fear of the unknown: We are generally scared of things we don’t know or don’t understand. Do some research before you venture out in the world of investing. A map/ guide is useful when you don’t know how to get to where you’re going. Determine your destination (time horizon) and choose a map(do it yourself) or a guide(an advisor) you can trust. Do all your checks before you choose either of these and also see how comfortable you are when you approach this. A little discomfort when you start a journey is ok as long as you are confident and this settles in sometime. A word of caution here, take small steps, invest small amounts, see your experience and then trust some more and invest some more. You could also dabble in different asset classes via mutual funds for fairly small amounts and evaluate the experience.

2.    Fear of losing capital: Since the pain of losing a rupee is much more than gaining one, we tend to focus our energy on avoiding losses rather than making profits. Nothing wrong with this approach, but this limits the growth of our investment portfolio since we want our money to work harder for us. There are ways to achieve capital protection whilst not compromising on growth. Asset allocation and investing according to one’s time horizon are two good ways to address this concern.

3.    Fear of volatility: Whilst we like predictability, it comes at a cost. In your portfolio, ensure there is a mix of stable and growth assets in a proportion which lets you do two things: Meet your goals and lets you sleep peacefully at night. Easier said than done though.

4.    Fear of missing out: When the talk at social gatherings is around investments- exotic or otherwise and people brag about how they have bagged an investment which doubled or tripled their invested amount, you tend to feel left out because either you are not invested or just not interested. People more often than not exaggerate their wins and conveniently avoid mentioning their own losses. So, don’t fall prey to that and take these conversations with a pinch (or a bucket, according to your taste) of salt. The normal reaction that follows such conversations is to search for that particular stock/ option/ asset class and invest in it. And more often than not, this tends to be a bad decision because you’re chasing something for its past performance and not evaluating it based on its future prospects. So, tell yourself this that while your portfolio may be boring, it is doing its job- it lets you be interesting and enjoy life.

For generations, we have been investing in FDs and RDs, it made sense for our previous generations when the options were limited and information wasn’t as readily available as it is today. Their expectations from life and from their money were also limited. Today, with our aspirations, lifestyle and expectations, investments in FDs simply won’t help us reach where we want to get to. We need better and smarter solutions for our investments and you should invest some time to evaluate who/ how this can be done.

Identifying and working with your fears is the first step to becoming a smarter, better investor.
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