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Disciplined Investing

Disciplined Investing
Disciplined Investing
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A casual observation of news will indicate that there is a stock market volatility. At the same time, you keep hearing about a weak rupee, rising fuel price, rising unemployment, slower growth and rise in interest rates. The rising investments by scores of Indians in the stock markets over the past few years has also made frequent market fluctuations a new normal, which tests the patience of investors separating the mature long-term investor to those who are worried each passing day about their investments. Money, especially investments is an emotive subject and the stock markets are a rollercoaster where emotions change based on market movements, impacting investors’ portfolio and their psyche.

If discipline was the only way to succeed when investing, excel sheet experts would have built more wealth than anyone else. What plays spoilt sport with investing is the human mind, which is biologically incapable of complete objectivity because every decision that we make is a combination of emotion and reason. This can be best described when investors get into stock markets at their highs or exit during the turnaround phase. According to William Bernstein, an American neurologist, author of investment books and an avid investor, we like looking for established patterns even when we know that finance is statistically far less predictable.

According to Bernstein, there is a part of our brain called the amygdala which makes us invest based on past information. And, when it comes to mutual fund investing, the regulator has made it mandatory for funds to display the disclaimer that past performance is not indicative of future results, yet many invest based only on past performance. So, how can you make sure that your investment decisions are in your best interests? A way out is to understand your own biases when investing, use past data to know the various outcomes, seek advice from others and reflect before making future investment decisions. With such an approach, you could overcome your investment weaknesses and not make the same mistakes again.

A fundamental need when you invest is to keep your emotions in check. This is not easy, but you can achieve this by knowing the mistakes one commits and how not to make them again. We are listing 8 examples which can give you an idea on how to address your biases and become a winner with your investments than rue over how you could have avoided them in hindsight.

1. I know it all: When it comes to managing money, you should be realistic about your abilities than carry any misguided conviction that anything that you touch will turn to gold. Take for instance how asset bias sets in when we start putting a lot of money into the same kind of instrument without understanding how other investments can balance out any adverse impact. The first rule of investing is to follow an asset allocation plan that fits your needs based on the risks that you can take with your money. You should then diversify your investments based on the recommended asset allocation and follow it.

A lifelong lesson is to stick the asset allocation that suits you and review the performance of your investments and rebalancing it to the allocation that you started with at least once a year.

There are more investors who have made money by sticking to asset allocation and rebalancing. Never forget this rule.

2. I will do it later: Procrastination is the biggest mistake to avoid when it comes to investing. The aversion to loss encourages everyone to delay making an investment decision at the cost of earning favourable returns in the future. It is common to desire for higher returns by believing that there is an opportunity for higher returns, which is much more than the potential loss. By delaying to invest, you are denying yourself the opportunity to benefit from the potential upside of investments. There are people who simply keep waiting, not realising the fact that once they get onto the train, it will help them reach their destination. Yes, there could be delays and halts, but eventually they will reach their destination. Investments are no different—all you need is a start.

Never fear the outcome of your investments. This will be possible only if you invest with a time frame in mind and a well-defined goal to achieve in that time frame. When you start small and persist, you will not only get over your fear of losses and also get out of your comfort zone of doing nothing.

3. Instant Gratification: There is a world of difference between heat and eat food compared to the one cooked over time. We live in a time when everyone needs everything that is new right now. The reality is that ‘I want it now’ belief works when consuming—it does not work when you are investing money. One of the oldest investors, Warren Buffett’s started investing before his teens, but he became a billionaire only when he turned 56. Investments take time and anyone promising instant results is akin to the many weight loss fads that float around. Don’t be trapped into believing money will double in short time.

Do not be restless with your investments. Just the way you do not measure the growth of a plant each day, because it takes a while to grow—invest with a time horizon and defined objective and let it reach that goal in its natural course. Every financial instrument comes with a suitable investment time frame and associated risk, by matching the two, you will benefit from the most desired outcome.

Understand the difference between needs and wants as early as possible when it comes to making financial decisions to judiciously use your money.

4. Mental Math: The biggest timeless investment con is when people talk of instruments in which investments can be doubled. This logic gets fuzzy the moment you bring in the risk associated with investments. Naturally, it is easy to get short-sighted about real returns when all you can think of is doubling your money. Take for instance the Kisan Vikas Patra, in which money can be doubled and is guaranteed. But, at 7.3 per cent interest compounded annually, your investment will take 9 years and 10 months to double!

Get real with return on investments and learn a few basic financial functions on a spreadsheet. Likewise understand the different between simple & compound interest, annualised returns, point-to-point returns and inflation-adjusted returns. By knowing these, you will know how your investments have fared at any given point than be misled by mental math.

Learn how to use a calculator on your phone to calculate basic returns correctly. Also, never forget that risk and return are two sides of a coin; don’t be biased with returns by ignoring risks and vice-versa.

5. Think before you act: In hindsight, every investment you make could have been perfect. Taking decisions with your investments without a clear plan or objective is welcoming unfavourable outcomes for your money. The best way to check on this aspect is to curb your impulse and think before you jump into an investment blindly. A simple way to check on impulse is to take a step back and think when you are unsure. You should also interact with people who may know it better to understand from than regret your decision. Yes, of course, if you still commit a mistake, you should treat it as a lesson for future.

Remember the phrase, “it’s not timing the market, but time in the market that builds wealth” before you undertake any rash decisions.

6. Don’t be in a hurry: Not spending time with your finances is as bad as not spending time at home with the family. If you don’t give time to money today, money will not give you the time you need it to stay with you. Start by giving a dedicated time slot to analyse your money flow statements. For many people, the priority of sifting through bank statements itself is a task. Little do they realise that a bank statement will explain where the money came from and where it went Those who manage their homes with a budget have a greater chance being financially successful. Once every year, you should evaluate the performance of your investments to decide on continuing the same or making any changes. Likewise, you should schedule to track your money, its progress to know if you need any intervention and if so, get into addressing the financial concerns you have than take umbrage in shortage of time.

Not having the time should not be an excuse for not starting, but that should not be the manner in which you also view your investments.

7. Coping with losses: Stock markets ups and downs are common should be well ingrained. Just because the markets have been going up since you started does not mean they will remain so forever. Yes, investing systematically in a rising market does allow you to understand the benefits of doing so, but it does not mean this is how your investments will be forever. Be ready to cope with a fall or a flat market, because markets fluctuate because volatility is the reality when investing. You should take the cue from a child, who tries to walk only to fall till the day they can work confidently and one fine day even start running. Understand how investments behave, depending on the changing market environment. It will help you factor in the period of gains with as much ease as you will be able to cope with the phases of dips.

Instead of direct equities, start investing in mutual funds through SIPs to learn the ropes of market downs and ups. This will go a long way in making a better investor out of you.

8. Meet the expert: You decide what you wear, where you go and the gadget that you want. But, when it comes to deciding what to do with your money, chances are high that you will seek help from your parents or older siblings. With this approach, you tend to catch the bias that your parents have with their money. As many of them would have gained from money in bank deposits, PPF, bonds, or investment in real estate, they would like you to follow the same. A reason for such behavior is the fact that there is not any formal financial literacy education to help us learn the tricks.

You should seek an expert in the field early on. For youngsters and those in the early phase of employment, the principal of equity for the very long term approach should be followed. Start investing in equities through systematic investment plans. Even if you spare `1,000 a month, you will realise its impact in a few years. You will also form the habit of investing systematically, early on in life.

Be responsible and learn about money management. Remember, fixed return instruments worked for your parents, because the returns from them were high and inflation low.

The mind of an investor is restless, but a seasoned investor is calm who keeps his emotions under check. For those seeking a quick-fix solution to investing, here are three essential quotes to always remember. The first is from financier Bernard Baruch: “Something that everyone knows isn’t worth knowing.” That applies to RBI policy, Brexit, GST, Monsoons and anything that’s in the financial press day after day, because it is already going to be reflected in prices. The next one comes from the great investor John Templeton. “The four most expensive words in the English language are, “This time it’s different.” The last is also from Templeton: “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.”

Focusing On Small Towns

Ashutosh Bishnoi, MD & CEO, Mahindra Mutual Fund talks about their rural-focused communication and product suit.

How is Mahindra MF differentiating itself from others?

We endeavour to offer savings and investment solutions through variety of mutual fund schemes, with special focus in small towns and semi-urban markets. As a result all brand communication has been devised using a combination of English and vernacular languages.

What’s been the learning so far from investors in rural India?

What we are seeing today is a big shift in rural India's savings and investment preferences. In the past, approximately 90% savings in rural India and small towns went into land and gold. But in the last 10 years or so, the galloping price of land and gold has put it out of reach for the common man. There is now a lot of confusion in rural people's minds about what to do with their money.

What about your current product offering?

On the savings side, we are offering debt schemes such as Mahindra Liquid Fund, Mahindra Low Duration Bachat Yojana and Mahindra Credit Risk Yojana. Under the investing options we have schemes like Mahindra Unnati Emerging Business Yojana, a mid-cap equity scheme, Mahindra Dhan Sanchay Equity Saving Yojana, a hybrid scheme, Mahindra Badhat Yojana, a multi cap equity scheme and Mahindra Kar Bachat Yojana, an equity linked saving scheme under Section 80C.

(A marketing initiative by Open Avenues)