Some “Evils” to Ward Off When Investing for Long Term

Dussehra is a festival that celebrates the victory of Lord Ram over Ravan in the Hindu Epic, Ramayan. Furthermore, it also celebrates the victory of Goddess Durga over the demon, Mahishasur. At its core, Dussehra celebrates the “victory of good over evil”.

Similarly, investing for the long term requires fighting certain “evils” that may reside in our minds. By attempting to do so, it is possible for us to hold onto our investments, helping us to create wealth in the long term.

Some of the evils that we need to fight are:

1. Greed and Fear

Equity markets do not move up in a linear fashion. A sharp rally in the equity markets might cause greed to set in, leading us to overinvest. But when there is a major correction, the psychology of fear might get triggered, leading us to frantically sell our investments. Both the scenarios lead to a bad investment experience.

Remedy for Evil #1: To escape this vicious cycle of emotions, SIP can be an effective route to invest in equity markets. The reason for the same is that the investment amount can get automatically debited on a periodic basis, leading to higher investing discipline avoiding mis-timing the market

2. Short-Term Thinking

Short-term thinking can make us lack the discipline of holding onto our investments, thereby making us miss out on the power of compounding in the long term. This is because various news and events, domestic and global, drive the equity markets in the short term, leading to disproportionate profits or losses.

Remedy for Evil #2: We should define our long-term financial goals, and chalk out an investment plan with the help of a financial advisor. For staying disciplined, investing systematically through SIPs can help us cut through the noise, and stay the course.

3. Availability Bias

It is human tendency to get influenced by events that come readily to our mind, while taking decisions. More often than not, most recalled events are unpleasant ones related to temporary loss of capital (For example: COVID-19). As a result, such events become more representative than they need to be, while making financial decisions. The fear instilled on account of availability bias can cause us to be under-invested in equities in our overall asset allocation.

Remedy for Evil #3: SIPs can help us to navigate through the short-term market volatility, helping us to remain indifferent to various macroeconomic events, and capturing the average effectively.

4. Herd Mentality

Historically, multiple instances, like dot-com stocks during the late 1990s or credit default swaps during the run up to the Global Financial Crisis in 2008, have caused investors to jump in at the peak of a market cycle, and exit with substantial losses. Ironically, investors have been willing to take high levels of risk at a time when a market rally becomes overheated. On most of these occasions, the mistake of joining the herd could have proven costly for many investors.

Remedy for Evil #4: Creating a financial plan is key. We can do so by taking the help of a financial advisor to ascertain our risk profile, defining long term goals, and form an ideal asset allocation as per ones requirement. Following these basics can help us become relatively less prone to blindly following what others are doing.

5. Timing the Markets

When investing in the equity markets, we tend to follow the strategy of “buy low and sell high”. But since equity markets are volatile in the short run, it is difficult to predict the correct entry point. Furthermore, during such a time, waiting for the “right time” can cause us to miss out on the power of compounding.

Remedy for Evil #5: Since it is imperative to spend time in the markets, we can choose to deploy our money in a staggered manner through Systematic Transfer Plan (STP). We can invest our surplus money in Debt Funds like Liquid or Ultra Short Term Funds, with an STP to periodically transfer to our desired Equity Schemes.

As humans, we try to be as rational as possible in order to avoid mistakes. However, evils, like the ones mentioned above, obstruct us from making wise investment decisions, leading to a behaviour gap. Thus, following the remedies mentioned above can help control the evils in our mind, which may help us emerge victorious, just like Lord Ram and Goddess Durga.

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