Using emotional logic to stay invested in equity mutual funds

Published: November 23, 2023 at 6:00 am

A global recession is on our doorstep at the time of writing. There are doomsday predictions everywhere. Equity mutual fund investors are worried about the lack of returns over the last several months. We discuss using “emotional logic” to fight fear and stay invested in equity mutual funds.

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.

We have already reasoned why one should first create a plan and stick to it regardless of market conditions: I have stopped my equity MF investments due to the global recession: Am I wrong? A downmarket is the best time to accumulate mutual fund units provided my needs are far away.

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 with capital market experience in the family. If I had asked them, they would have cautioned me to “go slow” (meaning not too much exposure) or worse, to “stay away”.

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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”. Still, I kept investing not because I used false and unsubstantiated logic like, “over the long term, the stock market always moves up”,  but because I was emotional. Also, watch my money story: How fear can make you rich.

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 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 the losses (or gains) that my investments faced. Of course, loss or gain worries me as much as anyone else, but each time I fear 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 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 would work 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 must remind ourselves to be logical but becoming emotional requires no reminders.

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

There will always be some doomsday predictions around. Someone will always talk about an impending market crash. Such fears are “unreliable”. The only reliable fear is the lack of financial independence after retirement. So let us be emotional about that!

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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 ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), 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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