Avoid Emotional Investing

There are factors that go beyond fundamentals while investing. Behavioural biases and emotions are couple of influences that play a major role in your investment decision and its returns. Fear and greed are the two strong emotions that may lead you to taking irrational investment decisions.

It is a well-known fact that no one can consistently time the market's peak and bottom. Despite this, many investors keep on trying to get their timing correct while investing. This is true not only for naïve investors, but also for the most seasoned investors and finance professionals who have good knowledge of investment rationale and good background of the market and its dynamics. They also get trapped by their emotions and take wrong financial decisions, which may lead to buying high and selling low. This is diametrically opposite to what has been taught in our first class of investing: Buy low and sell high.

Our cover story this time delves deep into this topic and tries to understand if these two emotions impact mutual fund investor's decision. We quantified greed and fear in a crude way to check if this plays any role in investing decision by the investors and how it impacts returns going forward. We see that many a time investors tend to join the rally when it is about to end and are first to exit before the next rally starts. This is well supported by inflows into equity mutual funds. When the equity indices are high, retail investors tend to invest more and start redeeming once the market has bottomed out. This seriously jeopardises their portfolio returns.

Let temperament not dominate your investment decision as it will lead you to lose sight of your true ultimate goals of retirement, prudent diversification and other important financial goals. Separating emotion from investment will make you a better investor.