Nifty Soars Past 12K. Watch Out For These Common Behavioural Investing Traps!

As the bellwether NIFTY index flies past the 12,000 mark today, many equity investors find themselves in a bind – behaviourally speaking. While it’s known to most that disciplined investing, coupled with patience, is what really reaps sustainable rewards in the equity market; history tells us a different story about how most individuals approach investing. With sentiments high but corporate performance not quite looking up the way one would expect it to, it’s a bit of a tricky situation for equity aficionados. Here are a few behavioural traps that could wreak havoc on your portfolio at this time – so watch out for them!

FOMO

You sat on the side lines waiting for the general elections to play out, and were armed and ready to jump in bravely in the event of a deep cut. But alas – Modi sailed through and the expected correction never came about. Now your buddies who ran their SIP’s religiously for the past two years are suddenly sitting on a 15% CAGR and you – well, you’re still on the bench! A classic scenario when you’re likely to suffer a bout of FOMO – or “Fear of Missing Out”, and that voice in your head is going to tell you to jump in quixotically, hook line and sinker. However, you need to calm down and have a solid tactical action plan in place. It’s very, very unlikely that market will just canter ahead unabated from this point on. On the contrary, we’re quite likely to see a range bound market for some more time, so a disciplined deployment over the next 3-5 months will allow for much better cost averaging.

Conservatism/ Anchoring

Ever heard of conservatism or anchoring? You may well not have; but you’ve likely suffered from it many times in your life. This bias prevents you from changing your viewpoint in light of changing facts or new evidence. In this particular scenario, we find investors anchoring themselves to two commonly held view points. One, that the NDA government will somehow, magically kickstart the juggernaut that is the Indian economy and two, that markets always rally whenever an election outcome is deemed as ‘favourable’. However, these viewpoints would ignore the multitude of systemic challenges that lie ahead, ranging from liquidity problems at NBFC’s to the stalled real estate sector, to slowing consumption.  So, it would be wise to ‘un-anchor’ yourself from these viewpoints and take a long, hard look at the equities as they stand today before you decide upon your target asset allocation. We have stretched valuations across the board, and it follows that a more conservative stock picking approach rather than a ‘spray and pray’ approach is certainly in order!

Loss Aversion/ Action Bias

Multiple behavioural studies have gone on to show that we basically loathe losses; in fact, the pain of losing 1 rupee has been said to be twice as much as the joy of gaining 1 rupee! It’s quite natural then that if you were among the investors who saw their portfolios consistently in the red since early 2018, you’ll want to ‘do something’ now that things are in the black. Two biases are going to kick in here – ‘loss aversion’ and the ‘action bias’. Remember though that booking profits now and sitting on cash will really not help you here in the long run. Instead, if you do want to use this opportunity to de-risk yourself, do so in a systematic manner via STP’s or weekly, disciplined profit booking from your stocks. Remember that the NIFTY may have taken off, but other indices such as the small cap index are still down 30% or more from their 2018 peaks and have a fair amount of catching up to do. Spare yourself from the dance of moving in and out of the markets, and approach your portfolio in a top down manner. Start with your target asset allocation based on your risk tolerance and medium-term goals, and work your way down to the stocks or mutual funds that you’d like to be holding right now. Don’t let your aversion to losses dictate your decisions.