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Invest with your Head not your Heart

Don’t let the market’s gyrations decide your entry & exit. Investing must be logical, not emotional…

The problem with equity investing is not the “stock market” itself - it is how investors go about investing in it. Any market will go through highs and lows and steep gyrations. Investors who get swayed by emotions and lose focus will be the ones to suffer.

Barclays Wealth recently came out with a report that came to the conclusion that emotional trading can potentially cost investors up to 20 per cent in returns over a decade. It also revealed that investors who frequently use financial self-discipline strategies are on average 12 per cent wealthier than those who do not.

The report reveals a prevalent mistake of ‘emotional trading,’ which can tempt investors to buy high and sell low. Recently, an email came to us where the reader asked us this question: “Should I continue with my SIP even though the market has fallen?” This reflects the mentality of investors who actually want to enter the market only when it is on the rise.

Where are we headed?
We understand people’s apprehension on the market. It has been going nowhere for a while and neither does it seem poised to head anywhere. The news on the street is not good. The world is looking murky.
There is the deterioration in the asset quality of public sector banks, slow down in corporate earnings, corruption scandals and scams, dwindling inflows from domestic investors and the pull out of over a billion dollars this year by Foreign Institutional Investors (FIIs) from India’s stock market.
Right now the market looks very range bound with a downward bias because of the negative news flow - globally and domestically. Frankly, there is no reason why the market should take off. Does that mean it has bottomed out? No one knows for sure. In fact, many are predicting a deeper correction around the corner.
Naturally investors poise the question: In such turmoil, is it wise investing in equity?
We would like to put it in another way: In such turmoil, why should you stop your SIP? It is actually the best way to ride the downturn.

Stick to the basics
Over the past several years, every major move in the stock market has caught market watchers and investors by surprise - be it the downturn of 2008 or the pick-up of 2009. So was the more recent correction. Those who tried to time the market have scrambled to catch up with events and have generally faced frequent periods of either lost opportunities or losses.
These occurrences are a perfect demonstration of how the conveyor-belt style of investing exemplified by mutual fund SIPs can easily take in its stride the worst gyrations that the stock markets can throw up. Investors who have benefited perfectly from sudden rallies have been those who have kept investing steadily through the lows, without paying any attention to which way the short-term movement of the market has actually been.
If you decide to terminate your investments in a downturn, you could lose out. That is because the SIP route to investing is not some magic trick. Neither is it a sort of a mathematical curiosity that can magically yield positive returns no matter what the state of the actual investment or the equity market.
In an absolutely fundamental way, regular, systematic investing has less to do with the investment and more to do with the investor. We know that the cost averaging that comes with SIPs is what generates the returns, but the real value comes from the fact that SIPs give investors a way of managing their own emotions. This is an investing tool, but its value comes from being able to manipulate the investor’s own psychology.
Don’t let the state of the market get to you. Don’t let emotions dictate your investment style and pattern. The market will go through roller coaster periods. Today is as good a day to continue with your SIP as was the month of December 2007. If you do not have an SIP but want to start one, please do so. But don’t keep away waiting for the market to pick up. The intrinsic benefit of an SIP is to stay with it through the downturns because that is where most of the units are accumulated. Don’t miss out on it.