Mutual Fund SIP’s And ADHD Investing

What’s common between Goalkeepers and Investors? It seems that both have an innate love for action – and not always to their benefit, mind you. This behavioural bias, known as the ‘Action Bias’, has hurt many an investor over the years. While goalkeepers automatically tend to jump towards their left or right, investors try to move things around from time to time (usually to their detriment).

As investors, we crave quick results just as much as we love instant noodles. We also hate ‘doing nothing’ with our investments. It wouldn’t be unfair to say that today’s mercurial investor suffers from an affliction called ‘Investment ADHD’ (attention deficit hyperactivity disorder); studies have shown that the global average holding period for stocks has been falling consistently over the years. Undoubtedly, the rapid rise of fintech based trading platforms have contributed their fair share to this trend.

There’s a double whammy effect in play when it comes to the Action Bias, as investment losses actually serve to augment this tendency. In other words, you’re a lot more prone to ‘acting’ when the chips are down – doing fruitless things like selling off underperformers after they have underperformed, potentially at a recovery-cusp. Talk about a snowball effect of underperformance leading to more underperformance!

A classic case in point is what’s happening with Equity Mutual Fund SIP’s (Systematic Investment Plans) right now. SIP’s that were started after the spectacular post-COVID rally in 2021 haven’t exactly delighted investors – many of them are yet to deliver great returns.

Anecdotal evidence suggests that some frustration is already starting to build within SIP investors; particularly first timers who got in with a poor understanding of the non-linear nature of their returns. Will stopping your SIP’s and re-starting later help? Most likely not, since SIP’s are long term investments that actually rely upon the skittish nature of the equity markets to generate superior risk-adjusted returns over longer timeframes. If you find yourself succumbing to this bias right now, take a pause and remind yourself that you didn’t start your SIP’s to speculate, but to create long term wealth. 

Better yet, align your SIP’s to long term goals such as your retirement or your child’s education; there are few things as effective as a tangible, relevant and distant prize to keep you on the ‘straight and narrow’ path on your investment journey!

When you invest in SIP’s for clearly defined financial goals, it goes a long way in reducing the “ADHD” effect. For instance, if you have SIP’s running for your retirement that’s 20 or 25 years away, you’ll be a lot less likely to watch your portfolio every day or try to make unnecessary tweaks every now and then. Your overall chances of success will go up dramatically.