Six deadly investment sins

Are investors emotional or rational in their investment decisions? Let's take a look.

The complexity of investment decisions has always made me feel whether investors make objective and rational decisions or are they swayed by their momentary emotions and psychology. The study of behavioural finance or how emotions and psychology influence the way investors invest make me aptly think, 'We can take the horse to the water, but can never force it to drink'.

Even investment advisors can guide, but can never rule over investors' emotions, and such emotions influence the wrong or right choices they make, as also other investors decisions for wealth creation.

Here's a bird's eye view of common irrational investment behaviours or six deadly sins that can destroy wealth.

Ramalingam K, an MBA (Finance) and Certified Financial Planner, is founder & director of Holistic Investment Planners (P) Ltd (http://holisticinvestment.in)

It is quite right, these investors believe, to follow what others do, and they do not use their own discretion or rationality. They just follow what others do and just get pushed into the river as the rats with Pied Piper.

This behaviour influences market trend of investments greatly with sudden crashes after a rise, with certain wise and shrewd investors like the Pied Piper making huge wealth by selling at the right time.

You would definitely find at least one wise investor, who says, 'I always told you to buy when everyone sold and sell when everyone bought'.

I-know-everything attitude can prove to be as destructive to wealth creation as following the Pied Piper.

It is true that just dictators like Hitler had a great fall due to lack of accepting public opinion, lack of humility and patient analyses by dialogue and practical thinking makes these investors dig their own grave with their investment decisions at times.

3. I have always held these shares, and they can be good

This behaviour of holding on to something known, for fear of the unknown just like a baby holding on to his/her mother on the first day of going to a pre-school, is bad, as even a child realises after a few days in school.

Similarly holding on to certain investments because of the low price-earnings ratio, or being well-known companies may prove wrong when the company is sinking.

It is true this chronic anchoring, without a fresh look at your investment decision based on the play of market forces could even make one suffer huge damages.

To avoid surgery just because it may be a failure, or it is better to wait and watch is just like holding on to shares of companies running at a loss with the hope things would improve. It is possible that such good times are just an illusion, making one suffer bigger losses and greater psychological impact on your life.

However it is quite likely that these lower prices could also be an indicator to buy using systematic investment/ systematic transfer plans and accelerate wealth creation with averaging.

Hence an incliantion to learn and grasp basic investment principles and shrewdness to judge the nature of share price decline, whether it is temperory permanent can help make a wise investment decision.

Rationality escapes investors' minds, who overreact to good and bad news.

The recession during 2008 made most of the investors overreact by selling their shares and mutual fund units thinking that the recovery will take a longer time and they lost in the bargain.

Similarly, sometimes certain unscruplous investors spread wrong news about the profitability of certain ventures, with amateur investors overreacting and investing all their savings in dubious ventures.

The only advantage that such overreaction has given is  when one gets to invest in good value shares that appreciate in the long run.

At times investors become sentimental with a particular share or a portfolio and don't sell those shares in any situation. One classic example is inherited investments.

You may agree that sentimentality, being too attached to inherited investments without gaining from the uptrend is what fools do. It is true we inherit profitable investments from our parents, but if they cannot be encashed at an appropriate time, considered as a blessing and used, I see no reason for inheritance at all.

Another classic example for this sentimental holding is ESOPs.

Some other based and baseless investment behaviours

Look out for ceratin other investment behaviours like:

• Attachment to certain investments of a similar nature
• Comfort zone for certain familiar set of investments
• Investments based on recent favourable or unfavourable happenings in the market

These attitudes will make you biased in taking investment decisions. So you need to be more careful in dealing with these attitudes when taking investment decisions.

The ultimate word

These are just guidelines for rational and goal-oriented investment decisions.