There's a lot in investing that you cannot control. Instead of worrying, savers should focus on what is in their own hands
20-Jan-2020 •Dhirendra Kumar
The Union Budget for 2020-21 is on its way and there's equal parts excitement and dread among investors. Expectations are high that Ms Sitharaman will pull some sort of a rabbit out of her hat and make some big, bold moves to restore confidence in the direction of the economy. On the other hand, there are those who are afraid that she will not. At the same time, some people are scared that the moves will be too big and too bold and too disruptive. So that adds up to three separate possibilities.
At this point, if I were to follow the script of investment analysts writing ahead of the budget, I would tell you which of the three views is my prediction and how you should make investing choices to prepare for it. However, preparing for specific events, more so the Union Budget, is the worst way of planning one's investments. Despite the hype, the budget's importance as an economic tool is at an all-time low. Very little of consequence now is left in the budget. With the coming of GST, indirect tax is entirely out of the budget's ambit. All changes are made by the GST Council that meets every month. Rates, rules, procedures - everything has been changing through the year. As GST settles down, these changes are becoming less frequent but they have nothing to do with the budget. Last year, the government showed that if the situation demanded it, direct taxes too could be fixed at any point during the year when the biggest change in corporate taxes for decades was made during the month of August. All that is left for the budget is personal income tax and capital gains tax. These are extremely important but just two out of the many things that used to happen in the budget.
There are many other things that could happen in the world that may impact your investments. The actual events, as well as their impact is unpredictable. Moreover, it's almost a certainty that the first impression of the impact will be very different from what will actually happen. So what's an investor to do?
Perhaps, then, it may be better for investors to focus more on what they can control. You have control over when you invest, what you invest in, what price you invest at. You can control whether you invest it in a great excitement in some bubble, or whether you invest systematically and gradually. You also have complete control over the money you are going to invest in. How important is that amount of money in the general scheme of your finances? How long can you invest it for? Will you need it suddenly, or is it for a planned expenditure. How stable are the rest of your finances?
That's the stuff about which you are in control, or you have real information. The veracity of the information and understanding you have over your own finances is (or should be) of a very high quality, a whole lot higher than that of your information about the impact of the budget, or political events, or the US trade war with China, or the apparent demise of the auto industry, or the RBI's actions on interest rates or anything else.
This is a form of 'control bias', which I've written about elsewhere. People worry too much about what they don't have control over, but not enough about what they do have control over. The classic example is that of the fear of flying vis-a-vis the overconfidence of driving. Because we don't know what's going on in the flight deck, we worry too much. However, when we drive ourselves, we don't worry enough. We don't bother to drive carefully, and take needless risks. At the end of the day, the outcome is far more dependent on what we can control rather than what we cannot, and that's what we need to focus on.
How much we save, how much we invest, what we invest in - these kinds of choices will have a far greater impact on whether we achieve our financial goals than external factors.