How to control our emotions when investing in mutual funds

Published: January 17, 2021 at 11:17 am

Every time the market hits an all-time high, many investors get jittery. Questions like “should I book profits now?” “Should I stop investing now?” start doing the rounds in social media. This article discusses a simple way to handle our emotions when investing in mutual funds or any capital market-linked product.

The adage, “show me your friends and I will tell you who you are” can easily be modified to suit investors who ask seek counsel on social media: “ask your question, and I will tell you how well planned you are”. Yes, most people who ask questions in personal finance forums like Asan Ideas for Wealth (on Facebook) want to manage money without a plan (and often get angry when we point out the obvious).

Members of this group admitted in a poll (held months before the March 2020 crash) that 1st-time investors would never buy MFs if they knew about risks! So poor understanding about the product and unrealistic expectations are the most common reason investors abandon mutual funds, buy every shiny fund they come across etc. This lot is beyond redemption and is not the subject of this article.

Let us focus on investors’ who appreciate (1) why they need equity in their long-term portfolio; (2) the importance of goal-based investing and asset allocation. Many such investors find it hard to stay focused after investing and worry about doing the right thing.

We shall consider an idea which appears to be an oxymoron at first sight: emotional logic. It is only an idea, and like all ideas hard to implement, however, my hope is at least a few reading this would appreciate its value the next time they think of deviating from their investment plan.

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    We have already presented the quantitative reasoning behind sticking to a plan: Should I stop my mutual fund SIPs when the market is at an all-time high? However, what appeals to the brain may not appeal to the heart. So let me present an example, my own.

    When I started investing in equity mutual funds (June 2008), I had no one in the family with capital market experience, and if I had asked them, they would have cautioned to “go slow” (meaning not too much exposure).

    A story many regular freefincal readers would know: for the first five years, my returns were zero (uncertainty after 2008 recovery). I knew my portfolio was “red”, but I kept investing not because I use logic, but because I was emotional. Also see: How fear can make you rich: my money story.

    We can never get rid of emotions. We can, however, prioritise these emotions. That is, be more emotional about one thing than another. When I started, I had a big chunk of debt I owed my brother-in-law. Life had taught me the importance of money in a harsh way.

    My first “goal” was “never again borrow” (of course, I did borrow again – another hospitalisation, but that was the sentiment anyway!). I saw how my parents’ finances (and mine) were woefully inadequate in handling my late father’s cancer treatment. So I told myself, “I should not be found in the same spot when I get old”.

    The emotional requirement to change my life was far more substantial than losses (or gains) that my investments face. Of course, loss or gain worries me as much as anyone else, but each time I fear about profits evaporating, I try to remind myself of emotional requirement #1.

    That is what I mean by prioritising emotions or emotional logic. Without equity, an average salaried person can’t achieve financial independence or change their social station. Being emotional about this reality and putting it above all other emotions is crucial for systematic investing and systematic goal-based portfolio management.

    In other words, unless we are passionate (= focussed emotion) about changing our life, we will always run to the safety of fixed income at the slightest sign of gain (or loss) and ensure we never change our life.

    This is how I control my emotions while investing in equity mutual funds. I do not claim it is foolproof, or that it would for everyone. And it is always easier said than done, but I found the notion of putting one emotion above another quite “logical” 🙂 After all, we have to remind ourselves to be logical but not emotional.

    The next time you are worried about your gains evaporating, focus on your goal, asset allocation and maybe remember the discussion in this post. The next time the market crashes, this might help: Worried about the market crash? Use emotions to understand the cost of pulling out

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      Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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