Focus on investment behaviour in 2018
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The new calendar year symbolises a new beginning and is a also time to review or rebalance one’s portfolio.
In the last year, many new investors began the equity journey through systematic investments in equity-oriented mutual funds. Retail investors also exhibited confidence in market-linked fixed income products like ‘dynamic bond funds’ and ‘short-term income funds’. According to data from the industry body Association of Mutual Funds of India (Amfi), till September 2017 the retail investor folios in equity funds had increased around 17% and the debt-oriented funds around 5.5%. In the second half of the year, many got lured into trading on the block in cryptocurrencies. So far, this trade does not seem to be backed by fundamentals. Nevertheless, the balance is titled in favour of demand, which gave a strong upwards push to prices.
There was interesting activity in other assets as well. So, let’s say we give you a list of the best financial products around today and all the stats about their returns performance too; will you need any other input to make your investing decisions? Actually, yes.
In all the talk about financial products, one tends to overlook financial behaviour. Personal financial management and investing are as much about the financial products you buy or invest in, as they are about your investing behaviour. Take out time at the start of this year to review your financial behaviour, for a more efficient financial outcome. Here are some suggestions to help you get started.
Investments need your thought and time
While your friend may have made a lucrative deal, buying a stock when its undervalued and selling at the right time just before its price started to correct, simply following someone else’s investment path is not going to yield the returns for you.
Building your own investment path requires discipline. Discipline is a broad term that covers aspects like being regular, understanding the product features, costs and benefits of what you are buying, discarding inertia, avoiding peer pressure in investing, and taking out the time to execute your plans.
According to Tarun Birani, founder and chief executive officer, TBNG Capital Advisors Pvt. Ltd, “Investors tend to have a familiarity bias. There is a lot of inertia among many to shift out of real estate or gold despite no returns. This is simply because they feel an emotional familiarity. Second, clients tend to recall what is most available or talked about now. Mutual funds are the topic among investors today, so many are investing. But then cryptocurrencies too are sought after.”
A part of the dilemma is also inertia to change what is already there, even though it may be unprofitable. This is one big lacuna in discipline that many financial advisers deal with.
According to Anup Bansal, co-founder and managing director, Mitraz Financial Services, said, “Many clients come to us with existing investments. Despite visibly poor returns, it takes time for them to action a shift or a sell. At times it can take many months or years. The inertia to move forward may be because there is a fear of regret, what if I sell and miss out on future returns?”
Reviewing your investments and making choices about what to hold or sell, ideally should be part of the process even if you are not changing your adviser. An adviser can assist you in making the right choice. However, the ability to choose should be driven by your understanding of a product and the objective of making the investment.
Along with your money, also invest your acumen and time. Don’t just follow what others do.
Align with an asset allocation
Don’t buy a product simply for the expected returns. Ideally, allocation is driven by long-term financial goals and objectives. The second level of behavioural complication occurs when you find that one particular asset class is doing well and that part of your portfolio is seeing a rise in value far greater that anticipated earlier.
If this continues for some time, you will find that the allocation to this asset has increased beyond the limit set out in your portfolio. Despite the prospects of even higher returns, you should try to re align your asset allocation and redeem funds from this asset.
Birani says, “When equity markets are doing well, its extremely hard to convince clients to sell even though their equity allocation, thanks to the price rise, has gone far beyond the pre-set level. At times, a kind of herd mentality takes over and they don’t want to sell because they see everyone else buying.”
Often investments are made after enquiring about returns rather than utility. This also causes confusion about when to exit. At times, you may end up holding on to an investment longer than required or you may end up avoiding an investment that brings a balance and stability to the portfolio.
According to Yogita Dand, a Mumbai-based certified financial planner and registered life planner, “Clients compare returns but forget other aspects. Today when we have clients who want to invest in equity, we have to sensitise them to the valuations and the time horizon of investment. You can’t expect markets to continue giving past returns. Second, what is the purpose? Is it to make that 15% return in a year or are you creating wealth?” Over-allocating can be risky in the long term, as you may not be able to exit at a favourable price when the asset cycle turns. At other times it’s about getting yourself to book losses and re-allocating to more efficient products. According to Bansal, “Investors can get emotional about what they hold and be unwilling to book a loss in a stock or a mutual fund because that then reflects poorly on their choice. Instead, they hold on hoping that someday losses will reverse.” Admitting that it was a bad investment and booking timely losses can improve portfolio returns. This also requires you to let go of emotions when reviewing your asset allocation or the specific products you have in a portfolio.
Deadlines work in the office and they work for investments. One of the reasons systematic investment plans in mutual funds work well is because they have a pre-decided date. The investment must go by then. If there is no deadline, actions tend to get pushed forward and eventually you can end up spending what you should have invested.
Deadlines can push you towards positive action on your portfolio, says Birani. Milestones can be set not only for investing but also for reviews and portfolio checks.
Ultimately, successful investing is about all kinds of discipline. Don’t let yourself be taken in by cliched investor behaviour in 2018, don’t get lazy, try not to follow that big herd and sharpen your financial behaviour to get ahead on your long-term investment goals.