Reduce the behaviour gap to get better of mkts
I was recently listening to an investor who redeemed all his investments running into multiples of tens of...
I was recently listening to an investor who redeemed all his investments running into multiples of tens of lakhs as he disagreed with his advisor. The investor was happy with his advisor for the last five years and when the investment returns were not up to his mark for the last year, he decided to withdraw all his investments.
It was over some disagreements and in a fit of rage, he would probably repent the mistake sometime later, but its now already done and there is no going back.
A further detailed discussion pointed out that the portfolio was realigned about a year-and-half back to accommodate the market changes and so possibly the underperformance.
And I was frankly appalled at the decision by the investor pull out the entire portfolio, he could have instead cut the advisory services and still could have approached someone else or there are many other ways to deal with the disappointment of the past one-year returns.
But he chose this and even if the market performs, he would stand to not gain any, a great opportunity loss and injustice to all the hard work done over the past few years of savings and investing.
I have used this space to point out many times that success in investments is based on how we control or manage our emotions. Most times, we give in to our emotions and the investment returns are true reflection of these actions taken during those times.
There are innumerable studies that concluded this paradigm. So, behavioural gap is a very critical measure which amounts to the difference in returns that we experience when we let our emotions get the best of us.
That is why I define my role as an advisor is concentrated on two critical parts, other than helping to design an appropriate portfolio that is in-line with their risk appetite and in-sync with their timelines, is to nudge and be a speed-bump.
My question for any of my investors whims has always been a 'why'? I feel that question serves the purpose of bringing in clarity to any investor.
If the decision is to invest, then ask why. And probably why now and then why that much amount and so on until you are convinced about your decision at the first place.
Almost all the times as the layers of the same question is answered, the emotions are further filtered, and a rational approach or solution is arrived.
This is a very practical tool and I employ all the times when any investment decision is to be made. So, this is my role as a speed-bump for my investors or clients.
Whenever, they are charged up I pose as a bump in their emotions and probably help them to make right suitable decisions.
Sometimes, we get anchored by our biases about investing into a certain avenue or at a particular time which would then create an opportunity loss. In investing, while we crave for better returns or even better timing, we many times fail to act when an opportunity is presented.
Though, its not easy to always find an opportunity at will, its neither too tough. The very nature of how we spot an opportunity is a manifest of our earlier experiences, (which shaped or bolstered our biases further) our inherent inhibitions, our risk-taking abilities and capacities.
Hence, what I find as an attractive investment may not be true to others and vice-versa.
As an advisor, its my duty to not only identify an opportunity but nudge (if not cajole or push) him into committing to invest in to it.
I guess, this is a tricky situation that even advisors go through as we too have our own emotions and biases to overcome to present it in a rational way.
This also later forms a benchmark for the advisor as he would be judged on this recommendation earlier made to his client. As the market participants move between greed and fear the job of an advisor varies between bump and nudge.
(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])