DECLUTTER

The concept of simplicity has been emphasized by Leonardo da Vinci, who believed that it is the ultimate sophistication. It applies to all aspects of life, including relationships, work, home, money, and even the mind and heart. Decluttering is one of the most effective ways to achieve simplicity, which is the focus of this article.

The benefits of decluttering are many, including saving time, making better choices, prioritizing, focusing on what really matters, aiding memory, being consistent, and getting peace by removing complexities. To achieve simplicity, the following steps need to be followed:

1. LEARN - Learn how clutter and lack of simplicity affect the area of your focus, such as finance, productivity, or time. 

2. ADD : It would be rare that you would need anything to be added to your chosen target area of decluttering. However, it is possible and perhaps even a good time to add the most important things which you have been missing out since long. In finance for example , a comprehensive financial plan could be the one thing you are likely to be missing out.

3. PRIORITIZE : Prioritize and identify what is most important to you. What is the one thing you can and cannot live without? Organising into important and not important is an important step and you really would need to be strict here.

4. TARGET : The first step is to decide what to declutter? Since almost everything around us may be cluttered, deciding where to start is an important step. Choose an area or subject which you feel requires urgent attention and has been draining you out mentally or physically. This could be your finances, relationships or even your kitchen or wardrobe.

5. REDUCE : Reduce things that are unnecessary or hold no real value, such as consolidating investments, closing unused accounts, reducing debt, etc. Ruthlessly cut out the inessentials. 

In conclusion, Decluttering helps subtract the obvious and add the meaningful. It is important to remember that success in life is achieved when one only wants what they truly need. Few examples given above are with respect to personal finance as I found it easier to relate that one practical aspect of one’s life. 

We had earlier dealt with the same topic in our Digital newsletter

IS IT REALLY WORTH SAVING SMALL AMOUNTS PER MONTH?

 

IS IT REALLY WORTH SAVING SMALL AMOUNTS PER MONTH?

You may have heard the saying, "Little drops of the water make the mighty ocean". Well, this quote is suitable in different situations, and your savings are one of them. It's a no-brainer that we Indians have always been good savers. But with the changing times, our saving nature is also shifting. We are moving from good savers to smart investors, and saving is a vital part of the journey.

Saving money is the essential aspect of building wealth & stress-free financial future. Different driving factors have led Gen-X & Millennials to become more informative about their savings & investments. Indian youth is aiming for early retirement and financial independence in the coming years via smart investing. But too much information is passing around, raising more confusion than clarity!

Coming from middle-class background, the question of "how much money is enough to start saving or investing?" is the confusion most millennials are dealing with in their initial earning years.

Well, there are two ways to answer this question.

• First is with pure mathematics, data & facts; and
• The second is psychological.

In this article, we will discuss both.

 The Figurative Aspect (numbers):

Firstly, to be clear, there is no such thing as enough money for savings. To save, by definition, means putting aside something from your income. The amount of income or savings usually depends on the individual. So even if you save say Rs.2,000 per month from your salary, it will count and help you create wealth in future. Small savings may not seem like enough initially, but over time, they compound efficiently and contribute to growing your wealth, sometimes huge and sometimes small depending on the time given. In simple words, to save some is better than to save none!

Let us assume you are 25 years old, & your future saving scenario can be anyone from these two cases:

1. You start investing small amounts in SIP, say 2,000 per month at 25, and you grow your SIP yearly by 10%.
2. You don't invest a small amount and begin your SIP at 40. Where you are investing Rs. 20,000 monthly, and you grow this SIP yearly by 10%.

So, If you expect the returns to be at 15%, At the age of 60, you will have the following corpus:

 

Scenario	Case I	Case II
Age	25	40
Monthly Inv.	2000 (10%)	20000 (10%)
Term	35	20
Total Investment	₹ 65,04,585	₹ 1,37,46,000
Corpus	₹ 5,44,45,461	₹ 4,99,46,362
Wealth	8.37 times	3.63 times

 

As you can see, in case I, when you start at 25 with an amount as small as 2000 rupees and grow it annually by only 10%, your total investment comes to around ₹65 lakhs, but your corpus grows 8.37 times, a total of 5.44 Crore!

On the contrary, if you start investing late, say around your 40s, even with a total investment of 1.37 Cr., your corpus only grows 3.63 times, giving you a total of 4.99 crores. Now, this amount may look massive and appropriate, but if we consider case-1, it is definitely low.

In a nutshell, if you start an early SIP with a small sum and increase these deposits gradually in a disciplined manner every year, you will wind up investing less and building great wealth over time with the power of compounding. The mantra, therefore, simple, start as early as possible, even if small, but grow it regularly and let it grow bigger over time. Be patient a let the power of compounding do its magic.

So, if you also want to plan your wealth similarly by SIPs, you can refer to these easily accessible SIP calculators available on NJ Wealth Website.

 

The Psychological Aspect :

 Aside from these figurative benefits, there are also some psychological benefits of investing in small amounts.

 Helps to develop a habit of savings :

So, if you start investing small amounts from your earnings right from the beginning, you are forcing yourself to take that chunk of money from your monthly income and invest it somewhere. In this process, you develop the habit of saving money regularly, which is not easy to adapt when the world provides you with many distractions. Many people earn well and have a decent surplus, but they are unable to invest regularly because they don't have the saving habit! They have never done it before. And now suddenly they have to, so obviously they face difficulties.

 Can act as an emergency fund /kitty for spending :

Saving small instead of waiting for the 'right time' will help you save some money for emergencies. You can avoid many difficulties and life barriers by setting aside money with discipline. You can also plan for things like home appliances, gadgets, car upgrades, etc in advance with these small savings so that they don't pinch you hard at one go.

To sum up, the sooner you start, the better it is, regardless of the amount. It's never too early to start saving for the long-term. Procrastinating savings when you have enough never really works and you will never have enough till the habit of procrastinating is broken.

This article is an extract of our article published in August 2022 Digital newsletter

 

SIX COMMON MISCONCEPTIONS OF INVESTORS

The world of investing can be cold and hard. Especially when you start overestimating your abilities. Unfortunately, many also hold on some misconceptions and tend to act under their beliefs and perceived abilities. In this article, we explore some of these misconceptions and beliefs which are harmful to the interests of the investors.

1.       BEING INTELLIGENT IS THE KEY TO SUCCESS

Intelligence is overrated. Studies have shown that being intelligent, by itself, has little correlation to success in life. You do not need to be from IIM or IIT to succeed as an investor. What matters more is, in the words of Warren Buffet, rationality and emotional stability. Interestingly he says that if you do have an IQ of 160 (considered very high), you should “give away 30 points to somebody else” because “you don’t need a lot of brains to be in this business”.

 

If one is not into researching stocks and directly investing, which is a full-time profession in itself, one really has no need for any intelligence. As an investor one needs only average intelligence to be able to understand and take personal finance decisions based on simple logic and reasoning and ignore emotions and personal biases from these decisions. As is often said, investing is simple but not easy. Intelligent people may often complicate things, including their portfolios and investment strategies. Intelligence often also comes as a hindrance in accepting that you made a mistake and accept contradictory views. Brilliant people may also get attached to their models and put a lot of thoughts into their actions. Temperament rather than intelligence is the key.

2.       INFORMATION AND NEWS IS VAUABLE AND ACTIONABLE

Do you really believe you have access to any undiscovered information that can impact markets? Do you think you can make use of this info and perhaps every important news as inputs to make investment decisions? If you do, how has it impacted your returns? The only ones who share information and peddle views, tips on them are those who either sell information or profit from the clueless small investors who trade on its basis, lured by the promise of high returns.

This belief also correlates with the earlier point. People with high intelligence often lack the temperament to control the urge to react to information and make changes to the portfolio every now and then. If only markets reacted logically, every economist and analyst would have been a millionaire. Over 95% of all what we read and hear is noise and bears no material impact on our returns, although it may have a negative impact if we intuitively act on them! The rest is what remains “may” warrant some consideration, factual or fundamental in nature or voice of the experienced investment gurus in market swings.

 MARKETS ARE FAIR AND CARE ABOUT TODAY

The efficient market hypothesis also known as the efficient market theory is a very common/popular theory on equity markets. It says that the share price always reflects all information and trades at fair value in the markets. This makes it almost impossible for investors to purchase undervalued stocks or sell stocks at inflation prices. This theory did help Eugene Fama an economics Nobel prize in 2013, unfortunately, though, it hasn’t really helped investors meaningfully.

Reality is far away from this rational theory which keeps running into irrational investors in the market. In reality, there are many different types of players in the market with different objectives – traders, speculators and investors. This makes it difficult for a small investor to estimate the real, fundamental value of any stock. The recent months we experienced once again that markets behave irrationally, at extremes. Wise investors need to look out for the irrationality of the markets to find opportunities and act in contradiction to the markets instead of believing blindly in what it tells them.

4.       NOT HAVING A PLAN IS NOT A BIG DEAL

There is a maxim used by traders in the market which very few investors may have heard of - “plan your trade and trade your plan”. While we are not in the business of trading, nothing stops us from learning from this maxim. What it simply says that before investing even a single rupee, we should have a clearly defined plan or strategy or an objective/purpose for investing at the very least.

Investors should have defined goals or portfolios that follow a strategy – the most ideal being the asset allocation strategy for retail investors. Having a strategy is what gives you an answer as to what to do in different market cycles. Effectively, you will be investing in your strategy and not the underlying products directly. It would also help you rebalance your portfolio periodically or during sharp market movements. Managing your portfolio manually is possible but one may not be able to consistently follow a strategy

  TOP PERFORMING FUNDS ARE THE GOOD BETS

Should I switch to top-performing funds? With rising awareness and easy access to investment applications, many investors feel that they can easily find top-performing funds and ask this question. Wouldn’t it be so easy for everyone if things were so simple? The real question investors should ask is ‘do top funds continue to outperform’?. The answer to this is that they often don’t.

Likely, a top-performing fund today may not be so two years later. Taking decisions purely based on historical returns is not a good idea. Most websites and mobile applications showcase ratings that are purely on these historical returns and do not consider many other crucial factors important for decision making. Some experts claim that only about half of the top-performing funds do better than average returns in the next year. It is a fact that chasing top performers can be harmful to your portfolio and this is what many new investors are now realising. The regulator, in fact, mandated the publication of the standard disclaimer - ‘past performance is no guarantee of future performance”.

6.       TIMING THE MARKET IS POSSIBLE

“Buy low sell high”. Sounds very exciting! Market timing makes for a great story and that is why so many investors are attracted to this idea. There is an underlying belief here in our ability to predict markets and actually even call out on market tops and bottoms. However, this strategy clearly falls apart under scrutiny. Markets can stay irrational for a longer time and can test the patience of a rational mind. The primary reason being, the markets are not efficient and not rational. We have seen so many market booms and busts, however, there is little evidence that anyone has successfully and consistently predicted them with definite time frames, including the top investment gurus in the world.

Research suggests that investors who buy and sell stocks during periods of market volatility may see lower returns than investors who stick with an established investment strategy. Studies in US markets have shown that investor would need to accurately time the market 74% of the time to earn more than someone who just stays in the index. Another study indicated that less than 50% of “market timing experts” predictions were correct. You can better toss a coin to get a better prediction. Trying to predict markets can leave your portfolio in a vulnerable state. A better strategy would be to simply follow a disciplined investment approach like SIPs and/or following an asset allocation strategy. Following this approach and sticking with it will leave you in a much better position to achieve your financial goals.

This article is an extract of our article published in September 2020 Digital newsletter

THE 7 GOLDEN RULES OF WEALTH CREATION

We all have dreams and aspirations, especially when we are young. Be it an early retirement or palatial home or big cars. Unfortunately, most of us find us difficult to reach these dreams and have to either give up on grand dreams and set realistic ones or wait till you become too old to afford it. There are only two ways to ensure that you change this. First, earn enough money which may or may not be possible for everyone. Second, walk the easier but the longer path of saving & investing.

One of the important pillars of financial wellbeing is proper financial planning. Financial wellbeing is simply where you have more than what you need, and the extra is invested for an even better future. Often, we complicate wealth creation much more than needed. At risk of repetition, we dare say again that we have to go back to the same age-old principles of investing and wealth creation. They are timeless, simple and yet, very easily forgotten. There are still people out there who have dreams and aspirations but do not follow these critical and life changing rules for wealth creation. In this article, we present the seven rules of wealth creation

 

1.       Time is of essence:

Starting early is half work done. The best time to start investing was when you got your first pay cheque. The next best time was not today, but yesterday! There is no tomorrow, you have got to do it today if you are serious. We all know about the power of time and the power of compounding which can do wonders. But unless you don't start early or asap, the end date for the wonder to unfold will be too late. We have to get time on our side else, we would have to work doubly hard to make up for the lost time.

2.       Saving aggressively matters:

Give a 5-year-old child her favourite ice-cream and ask here if she wants to eat it now or give it back and have two the next month. What will she do? Often, we are no less than that 5-year-old kid when it comes to choosing between instant vs delayed gratification. We cut corners here and there to buy things we don't need to show off before people whom we don't like. Frugality and minimalism and the in words today. Instead of spending on riches & luxury, it's always better to spend on upgrading yourself, learning, setting up side-business and save /invest in appreciating assets at the very least. The more focussed and aggressive you are today and the more you enjoy the journey, the sooner will you reach your destination.

3.       Asset Allocation, is the key:

We often cannot see the forest for the trees. We lose sight of the big picture and spend more of our time in knowing which fund will perform the best, which is the next big multi-bagger, how my funds have performed, and so on. How does it matter even if your fund level performance if plus or minus a few percentages when it occupies only a fraction of your portfolio? Shouldn't we really see the big picture? A typical household in India today has huge exposure to real estate and gold, occupying almost half of all the wealth. The other half is in financial assets where again bank deposits, government small saving plans, insurance investments, etc garner a large share. The lowest exposures are to equities and mutual funds - the products which are crucial to exponential wealth creation over the long term. What we are only suggesting is that everyone should have a well-balanced portfolio with the right exposure to equity asset class as per the risk profile & returns expectations. This will have to be revisited and portfolio rebalanced from time to time, periodically and market event driven.

4.       Emotions need to be tamed:

Many studies have found that equity markets have delivered very attractive returns over the long term, outperforming other asset classes. This is in spite of all wars, events, crisis, pandemics, etc, etc. However, investors have rarely made those kinds of returns. And the reason is exactly these temporary aberrations which tested the conviction of investors and most investors unfortunately failed. Warren Buffett once said "If you cannot control your emotions, you cannot control your money." Our emotions and our behavioural biases often cloud our decisions and instead of acting rationally and against the herd mentality, we become part of the herd. We enter markets when it is late and exit early. With all the noise around us and all the easy information available, we try to time markets and make 'smart' decisions, when perhaps, even getting stranding on a lonely island without a mobile network would have proved to be financially more profitable! Remember, even refusing to do anything is doing something.

5.       Diversification helps, but only to that extent:

We all know that diversification reduces the overall risk of your portfolio. The guiding principle is that not all assets will behave the same at the same time as they would carry different set of risks and return factors. Diversification at the broad level is required also so that you can play that asset allocation game properly and as per a set strategy which can be executed on an ongoing, periodic basis. However, too much diversification into too many asset classes, products, etc would also mean that a lot of underperforming assets sneak into your portfolio. You can't really make good money betting on all horses in a race. Some experts are also of the extreme view that you diversify if you don't really know what you are doing. So it is a matter of the optimum balance, the right mix of a few important things. One may zero it down to say equity, debt and physical asset classes and have exposure to select financial products /securities within these asset classes and again some limited diversification w.r.t. fund categories, AMC, market-cap, sectors, duration /time to maturity, underlying instruments, etc within these products.

6.       Don't miss out on wealth preservation /protection:

All it takes to wipe out your wealth, is one unfortunate moment, event in a lifetime. We have seen many cases around us where families have been pushed back on years of progress in life by a tragedy, by business losses, by court cases, by crimes, accidents and so on. We can't really control what can happen in life, although we can be careful. However, we can certainly control the financial repercussions originating from such events such that our financial well-being is not compromised and we are not left at the mercy of fate. Having proper insurance, is one sure shot way of minimising financial losses and suffering. There are many products out there, both personal and non-personal out there which can protect us financially. Explore products related to life, health, personal accident, critical illness, home, motor, fire, travel, shopkeepers', professional indemnity, etc to minimise your financial suffering. The other way to minimise financial risks in life is to not take unnecessary risks (avoidance) and huge bets.

7.       Build on yourself. Build multiple sources of income:

One thing very common in all self-made millionaires is that they take themselves seriously. They are clear on what they want, they are focussed and passionate, have build good habits, strong character and display behaviour in line with their image and goals in life. They invest in people, in learning, developing their knowledge and skills, in building networks. Often, they don't risk everything on one product alone, even though they may be committed to one idea. They would have multiple sources of income, diversifying to things which interest them. They would try and automate /outsource /partner with or hire people in such a way that these different sources of income take very little time of their own. For them, money is not the destination or end goal but its journey, the game that excites them. This is what sets up apart from all of us on the wealth creation journey. Picture yourself what you want to become and be that today.

The above is an extract from my digital newsletter of December 2022.

HAVE YOU MADE YOUR WILL YET?

 

The Covid pandemic made us realise the fragile nature of our lives. It has changed us in more ways than we can imagine. It has also made us think of our plans in face of uncertainties of not just income but also of our lives. The need for estate planning and succession plans was also felt by many. Not surprisingly, Will writing saw a significant rise during this period. To look at it differently, it perhaps took a pandemic for people to realise the importance of having a Will and to ensure that it is kept up to date. In this context, we shall talk about the importance, benefits of writing a Will and the consequences of not doing so. We shall try and avoid getting too technical or using legal terms here and instead focus more on the context and encourage you to learn more about it at the end.

Who should have a Will ?

If you are wondering if you really need a Will or not, let us ask two questions - are you an adult with a sound mind? If the answer is yes, you should be eligible to write a Will. Next, do you have any of the following:

• Savings, investments, bank accounts, etc.
• Own business /share in a business
• Own property, movable or immovable assets, jewellery, etc.
• Insurance policy
• Children
• Any dependent parents, relatives /siblings, etc.

If the answer to any of the above is yes, then you "must" have a will. Period.

There is a myth that a Will is only required by wealthy people or people who have huge assets or businesses. This is a complete misconception and in fact, a Will should be prepared by any person who falls in our criteria, irrespective of the quantum of savings or wealth you have. In fact, even if you do not have any of the above but you do have any wishes, owe any money to anyone, any last desires as to how you should be cremated or any such wish, a 'will' document should be on your agenda. There is also a myth that the appointment of nominees is sufficient and then there is no need for a will. Please know that in most cases, nominees are just trustees, custodians of assets to be distributed to legal heirs - who can be either chosen in the Will or as per law. They may only be entitled to receive the amount asset but are not entitled to own it.

What is a Will ?

Simply put, the Will or 'Vasiyat' or a 'Testament' is a legal document that communicates a person's last wishes specified before death. This can be a confidential document kept with a trusted person and which shall be made known post your death. It can be made to cover a lot of things, including but not limited to the following.

• How your own assets /properties /possessions will be distributed and/or handled
• How any minor children /dependents on you should be taken care of (guardian)
• How the share of minors will be handled till they become adults
• Any liabilities you have and how to settle the same. Also, include details of debt owed to you.
• Any wishes on how you should be cremated /last rites held
• Any wishes you have which can be carried out by your family
• Record all your assets, liabilities, etc at a single place ensuring nothing is missed by family
• Residual clause to manage asset left out
• Share details of key persons who manage your affairs
• Appointment of an Executor to administer the estate (management of all accounts and affairs)

 Benefits of making a Will :

There are many benefits of writing a Will and a lot will depend on how well you draft it. The main benefits can be as follows...

• Distribution /administration of your wealth /property as per your own wishes and not as per law.
• Smooth, faster and cheaper way to settle/distribute your estate.
• Avoid legal hassles, paperwork in difficult times. Quick settlement also helps ease financial troubles.
• Add a beneficiary who would have never been covered under the law. Note that a father is not amongst the first class of people to receive estate under Hindu Succession Act!
• Ensure the safety and security of your dependents, especially old age parents /children
• Protect your business as you would have wanted it
• Share details of all your accounts /assets /liabilities
• Help avoid disputes and fights between family members

 What happens when someone dies without making a Will ?

Simply put, for people who die 'intestate' or without a valid will, the law will follow its own course and this may not be to your liking. If there is no will, the property will be distributed according to the personal law of the deceased. The Indian Succession Act is diverse and states different laws of inheritance for different communities. We will not talk about the same in detail here but would encourage you to explore the same in detail and there is a possibility that you may be surprised as to what may be in store.

Further, all the benefits listed above will be lost in the absence of a Will. The amount of legal hassles and troubles your family may undergo at the time of bereavement to settle /transfer your assets will further add to their miseries. In case it is a big family, again there might be disputes in the family regarding the distribution of assets, especially things like property and business. All this could have been easily avoided.

Some things to be kept in mind :

The following are a few key things we think are important to know about wills.

• A Will should be written of free will, voluntarily by an adult of sane mind and with a clear intention.
• The language should be clear, easy to understand so as to avoid any confusion or disputes. Proper details of all accounts, properties and parties, etc. should be clearly mentioned.
• Shall cover only the property owned/created by the person and this does not cover inherited property
• A Will can be in any format, language and be written even on a simple page. However, it is highly recommended that it should be properly drafted in a legal format, covering all standard clauses to avoid any disputes. Formats are easily available online and there are even online websites offering the service.
• A Will should ideally be signed by two or witnesses and this does not include the beneficiaries under the Will and
• Registration is not mandated but recommended. There is no stamp duty and very nominal /token registration charges.
• Will should be kept updated to reflect any changes in property, family composition and so on. The Will can be changed/altered by a document called 'Codicil' which is considered as a part of the Will.

 Conclusion:

In most cultures, a Will is a taboo subject, not talked about and even avoided as a bad omen. Isn't this ironic that the same is not felt when buying life insurance when the event in question is the same? We see both things going together and part of the same coin. A Will document is not to be seen as just any legal document. It should be seen as part of your legacy and your expression of your love and feelings towards your loved ones. It is high time that it is also seen as a moral responsibility towards your family just like buying a life insurance policy. As part of succession planning, it should also be considered an integral part of your financial planning. In the end, let us ask you one last question - Have you made your Will yet?.... We leave the rest to your wisdom now.

This post is an extract from my November 2021 digital newsletter . . 

TOP BEHAVIOURAL BIASES IMPACTING INVESTMENT DECISIONS

Investment or financial behaviour and actions are driven by how we think. Knowingly or unknowingly, a lot of factors impact our decision-making. There is an entire field of study known as behavioural finance which is the study of the effects of psychology on investors and financial markets. It focuses on explaining why investors often appear to lack self-control, act against their own best interest, and make decisions based on personal biases instead of facts.

To be a successful investor in the long term, it's highly important to understand and overcome the common psychological biases that typically lead to poor investment decisions and mistakes. Most investors are likely to be influenced by these behavioural biases as they are hard-wired in the subconscious. Even the best of investors sometimes tend to take shortcuts, oversimplify complex decisions and be overconfident in decision-making. A better understanding of your biases will lead you to make better decisions, help you lower risk and improve your investment returns over time.

Following are a few very common yet key behavioural biases that usually leads to a bad investment decision:

Confirmation Bias :  It is a human tendency to seek or emphasise information that confirms an existing conclusion or a decision. Confirmation bias leads to investment mistakes as investors typically get overconfident because they keep getting data that appears to confirm the decisions they have made. Overconfidence can result in a false sense that nothing is likely to go wrong, which increases the risk of being blindsided when something does go wrong. To minimize this bias, one should attempt to challenge the status quo and seek information that causes you to question your investment opinions.

Information Bias : Information bias is the tendency to evaluate information even when it is useless in understanding a problem or issue. Investors are often bombarded with unimportant & useless information every day, from financial commentators, newspapers and stockbrokers, and it is difficult to filter through it to focus on relevant information only. In general, investors tend to make superior investment decisions if they ignore short-term market movements and focus on the long-term prospects for the underlying investments /asset class and look at their exposure in comparison to those long-term prospects. By ignoring routine market news, investors can overcome a dangerous source of information bias in the investment decision-making process.

Loss aversion/ endowment effect : It is a tendency for people to strongly prefer avoiding losses rather than obtaining gains. Whereas the endowment effect occurs when people place a higher value on a good that they own or have owned than on an identical good that they do not own. Investors refusing to sell loss-making investments in the hope of making their money back is the classic example of the loss aversion or endowment effect. This bias breaks a very important economic rule i.e. the measurement of opportunity cost. To be successful in investments over time; always measure the opportunity cost properly and not be anchored to past investment decisions based on the inbuilt human tendency of avoiding losses.

Bandwagon effect or herd behaviour : The bandwagon effect or herd behaviour describes gaining comfort in something because many other people do (or believe) the same. Speculative bubbles are typically the result of herd mentality. To be a successful investor, you must be able to analyse and think independently, which includes finding no comfort in the fact that other people may or may not agree with your decision. The simple solution is to be objective, factual, grounded and open-minded and not get influenced by fear or greed.

Anchoring Bias : Anchoring bias is the tendency to rely too heavily on or anchor to a past reference or one piece of information when making a decision. Anchoring bias can be hugely damaging to an investor’s research process. From an investment perspective, one obvious anchor is the recent share price. Many people base their investment decisions on the current price relative to its history. Unfortunately, where a price has been in the past presents no information whether a stock is cheap or expensive.

Familiarity Bias : Generally, we prefer things - be it food, people or places which we are familiar with. We like to stay within our comfort zone and hate change or new things. For example, a person investing in traditional investment products like bank deposits takes time to accept equities, even though it is in his best interest. Unknowingly this can push investors away from rational investing where they would prefer asset classes and underlying products of names /industries they are familiar with. In investing parlance, the familiarity bias dissuades us from investing in other assets or investment options that we are not familiar with.

Sunk Cost Fallacy : People often demonstrate a greater tendency to continue an endeavour once an investment in emotions, time, effort or money has been made. This is true when it comes to not just relationships, career, business, etc but the investment choices we make. This is the reason why are we likely to continue with an investment even if it would be rational to give it up. We become attached, we do not cut our losses, and instead, throw good money after bad while refusing to make the rational decision and make good of better opportunities.

Conclusion : The above are only some of the behavioural biases which are frequently quoted in literature. Through experiments, researchers have identified an enormous range of cognitive biases that can apply to financial decisions. For us as investors, we should accept the fact that much of what and how we think is being driven subconsciously by our psychology. These behavioural or cognitive biases, tendencies impacting our financial decision-making can potentially make or break our dreams. There is no doubt that investment behaviour and decision-making is at the heart of investing and the biggest factor for your success.

As wise investors, we should learn more on this interesting subject and aim to control or eliminate these biases, emotions from our decision-making over time. Financial decisions must be factual, data-driven and purely on merits rather than being impacted by anything else. Over time, we should all work towards establishing logical decision-making processes as we mature in our investment journey. The focus should be on the process rather than on the outcome. In the words of Warren Buffet, “investing success doesn’t correlate with IQ after you’re above a score of 25. Once you have ordinary intelligence, then what you need is the temperament to control urges that get others into trouble.” Simply put, it is not the intelligence or knowledge that matters for success – it’s your behaviour that will be the deciding factor.

The above post is a extract from my digital newsletter of December 2021