The fear factor and its impact on your investment journey

Sridevi GaneshNick Murray in his book 'The Excellent Investment Adviser' says “Fear is the primary cause of failure of most investment plans”.  Fear induces action and most of the times if not all, the action would be totally unnecessary.  Having said that, fear is also the main reason for not taking right action at the right time. In either of the cases, it is the fear of losing money or 'loss aversion' as it is called in the industry that plays its part.   He also adds, “Nothing that happens in the next 30 days will matter in 20 years time”.  How true is the statement!  Just think about it.  It is the investor who spoils the investment journey and not the instrument.  Fear induces inactionSuresh is an individual who would take his financial plan and make an attempt to act on the investment ideas whenever his employment poses challenges or uncertainties that he had not foreseen.  He would ignore the ideas and stay inactive once the situation is back to normal.  The fear of uncertain future draws him closer to his financial plan.  But once he feels that the situation is under control, the fear of losing money by investing in equities keeps him inactive.  While his financial plan would have won his trust the investment plan would remain to be a failure for the lack of appropriate action at the appropriate time.  A great lesson to be learnt here, isn't it?  Unless you start your investment journey, you would go nowhere!Inappropriate and unwanted actions are a result of fear of losing moneyIn this age of knowledge overdose, it is very difficult to stay away from noise for any investor.  After taking the hard step of investing, most investors are worried about what would happen to the market in the next week or month.  If there is available information predicting a fall then automatically based on that information, a decision would be taken that invariably breaks the returns that would have got generated otherwise.  Ask yourself the vital question.  During the years 1991 to 2000 how many events that occurred over a period of one week or one month that triggered a massive fall?  There would be many such events, isn't it? There are many scams that broke the hearts of millions, if you could recollect.  How would you rate the impact of such events now on a scale of 1 to 10, with 1 being the 'most severe impact' and 10 being 'no impact'.  Would you not come up with a rating in the range of 6 – 10?  I believe you would.  Remember the words of Nick Murray that was quoted at the beginning of this article.  Hence, do not jump to conclusions about the future of market based on short term events or predictions.  Even if the market is overvalued, systematically investing over long periods has delivered wonderful returns.  I have a friend who reads a lot on the markets and the short term outlook provided by various fund houses and other sources.  This information induces him to make decisions frequently on the portfolio composition.  He jumps in and out of schemes despite being advised against it, and invariably would faces rough weather when his predictions go wrong.  Similarly, he changes the asset allocation to equities whenever he feels a big fall or correction is round the corner.  I even remember a period where he was fully invested in gold and silver and had no exposure to equities.  He refuses to accept that he is focused on the short term, though his goals and the corresponding investments in equities are long term in nature.  This behaviour arises again out of the fear of losing money or the fear of losing an opportunity.  Despite having enough knowledge on the market, his fear has keeps him away from enjoying reasonable returns and his investment journey is ample proof of that.  Conquer your fear of losing money, and when in doubt discuss with your advisor.  Trust your advisor, do your homework before engaging one. Ask him questions about his recommendations. Once you accept his advise, do stick to it.  In his book 'Thinking Fast and Slow' Daniel Kahneman says that “It is easy to identify the mistakes of others than your own”.  This, he adds, is a fact based on research and plenty of data is available to support his statement.  Words of wisdom, isn't it?  Sridevi is a member of The Financial Planners’ Guild , India (FPGI). FPGI is an association of Practicing Certified Financial Planners to create awareness about Financial Planning among the public, promote professional excellence and ensure high quality practice standards.