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Stay positive for larger gains in stocks

Stay positive for larger gains in stocks
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It’s always how we respond to the market’s reaction that defines our investment returns

As per a survey conducted in the US among 2000+ adults published by Statista about America's top New Year resolutions for 2020, the most popular being 'manage finances better' with 51 per cent respondents voted it while 'eat healthier' has remained tied at the top.

Arguably, the most consistent among all resolutions across the world i.e. 'lose weight' stood fourth in the list with 42 per cent while with 50 per cent votes polling to 'be more active' turned to be a close second in the list.

I was pleasantly surprised to see the joint topper on this year's list of resolutions which is generally occupied by eat healthy, lose weight, etc. despite many reports suggest that most fail to keep up these as the year progresses.

A critical part of any comfortable life in today's world is the ability to manage finances.

Even the success of any great financial plan hinges upon the proper budgeting. Like the survey pointed out, it's as important as the eating healthy or having a balanced diet. It's also equally as difficult.

According to U.S. News & World Report, a massive 80 per cent is the failure rate of New Year's resolutions and most of them lose their resolve by mid-February.

Another study pegs this at about 40 per cent in first six months but still is a sad reality considering the benefits of living up to these resolutions.

To make these resolutions work depends more on our part, at individual level, of training and conditioning our brains to see the success but we tend to absorb ourselves into the negativity easily.

In other words, it's also called as negativity effect or negativity bias; a tendency for bad events to affects us more strongly than the positive ones.

We tend to focus on bad news, amplify the possibilities out of these situations and get easily carried away into the extrapolations of the events happening.

This is something that we recently saw the trending of "WWIII" (World War III) on social media right after the US drone attack eliminating one of Iran's top military commander in Iraq.

This bias though only recognized in the recent years is due to the advancement of social scientists (behavioral finance) is usually ascribed to the fundamental aspect of psychology.

Studies have found that a bad first impression had a much greater impact than a good first impression.

During my early professional career, I was confounded on how a same percentage of gain or loss did carry disproportionate emotions by the investors. a same percentage of loss always carried higher reaction than the same percentage gain achieved.

This is again confirmed by the experiments of behavioral economists had shown that a financial loss loomed much larger than a corresponding financial gain.

Dr. Roy Baumeister and his colleagues at Case Western University looked for situations where bad events didn't have a strong impact.

Surprisingly, despite scouring multiple disciplines of sociology, psychology, economics, anthropology, etc. they couldn't find any compelling counter examples of good being stronger.

Interestingly, there's no psychology term for the opposite of trauma because no good event has such a lasting impact. Studies have proven that our negativity bias evolved due to our survival mechanism that our hunter-gathering ancestors developed to avert threats from predators, etc. has passed on these qualities to us.

Though, it was a necessary quality at that point, the overreliance on this quality now could lead us to make wrong judgements and decisions. So, what's the solution for this?

It's always said that it's not how the market responds to the news but how we respond to the market's reaction that defines our investment returns.

That doesn't mean we should never react at all. At the breakout of any event, we need to take stock of possible the situations and check if it could impact the investment avenue within the goal timelines.

If we observe, volatility is always associated stock markets, but it almost becomes linear over longer periods of time. That's why it's time spent in the market that gives rich dividends.

Also, it's important to have a good advisor who would be a speed bump to our thoughts especially of those that have negative bias.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at knk@wealocity.com)

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