Avoiding Instincts and Striking a balance between action and inaction

Back when we were hunter-gatherers, a small delay in decision making could result in us being hunter or prey. Often these decisions needed to be made quickly or instinctively. There was no time to think through the various options available. Our instincts have helped us humans survive over thousands of years, helped fulfilling our basic needs like safety, food, water and shelter. Most of these instincts are intact within us even today.

These instincts are not likely to have attuned to the past few centuries of the modern world (which has been a short period over a reasonably long period of evolution). We all make instinctive choices while shopping, choosing a movie on OTT, making a chess move, etc. In most cases, you benefit from quick decision making. There is also a bias for action. What about investing?

The world of investing, as we observe, happens to be one where patience pays, while instinctive decision making, more often than not, could prove detrimental. But how do we fend off habits formed over millions of years of evolution?

You have more time than you think

Unlike many situations in life, there is no immediate deadline to make many important investing decisions. For instance, you wish to decide how much equity exposure is right for you. Here, you need to consider various aspects of your life goals and situations, and you are likely to better off if you move slowly towards your desired level of equity exposure. In this situation, an instinctive action could potentially work against you.

What Is a Bias for Action?

A bias for action is the inner engine that propels us forward. It’s that urge to make decisions swiftly, take risks, and keep the wheels turning. Imagine being stuck in a traffic jam—some of us would rather explore alternate routes than sit still. That’s our bias for action at play.

When it comes to personal finance, with the advent of smart apps that tell you the value of your portfolio in an instant, our mind is constantly made to react – and reacting is not the best way to act. We are at our core instinct propelled to react – to change our allocation. To invest in that new idea. To invest in that hot theme. But we need to ask – is it in our best interest?

What’s the downside of too many instinctive actions?

> Excessive trading and Associated costs and risks:

Frequent trading due to impatience can harm our portfolios due to costs / taxes and possibility of missing the best days.

> Less Sound Decisions:

Rushed choices may lead to suboptimal investments. By reducing the number of decisions, you improve the quality of your decisions.

> Catching a Falling Knife:

Trying to time the market can backfire.

> Very crowded portfolio:

While diversification is a necessity, having too many financial products in one’s portfolio can be suboptimal for a plethora of reasons – tracking annually, taxation, changing nominees, updating details.

Mitigating the Risks

A well-defined formula for wealth creation has the following three elements – Sound Investment + Time + Patience.

> Automate Your Finances:

Set up SIPs that invest continuously and invest in Funds that match your ideal asset allocation

> Written Investment Policy:

Define your strategy and stick to it.

> Set Aside Money for Impulses:

Allocate a small portion for spontaneous spending.

> Focus on the Future:

Keep your long-term goals in sight.

Remember, a bias for action is a powerful trait, but like anything, it needs to be exercised with balance. Use it wisely, and your financial journey will be smoother and more rewarding.