Why you can’t rely upon Do It Yourself (DIY) investing?

Here are characteristics of our mind that will push us into making inappropriate decisions about our own finances.  How to overcome such circumstances?
  1. Mind wants you to be your comfort zone.
Effect:  You would more likely invest only in familiar and traditional   asset classes or instruments like FD, Gold, real estate etc and will not diversify and not spreading risks. The traditional assets or instrument will not help you in achieving all your goals.

Solution: consult a financial advisor and follow the rule of asset allocation comprising equity, debt, real estate and gold according to your age and your goals.

  • Mind remembers pains:
  • Effect: You would more likely to avoid investing again in the same asset class or instrument in which you had incurred loss earlier. 

Solution: Investments follows cycles and the past performance have no bearing on future outcomes.  So, trust the experts not your mind and invest in the instruments which are essential for your finances.

  • Mind justifies the actions taken:
Effect: You are likely to continue to hold loss-making or low return investments.

Solution: Do research on the instruments you invested. Check whether they are in sync with timeframe of your goals.

  • Mind become overconfident once something goes successfully.
Effect: Once you are overconfident on your positive results you are likely believe yourself to be a good fund manager and will not take advise on your investments.

Solution: Don’t wait to be reactive, realising your mistakes, for the losses which deflates your confidence. Be proactive, open to take expert advises and study on investing before entering it.

  • Mind seeks instant gratification.
Effect: You are likely to put off your long-term plan of retirement goals to spend on immediate want of holidays and gadgets. You withdraw from long-term investments for short term needs.  You are distorted by the short-term market volatilities and exit early with fear instead of holding for long term.

Solution: Automate investments and lock them for long term. To avoid early exit due to fear, stop frequent checking of your investments.

  • Mind likes speed.
Effect: you likely to accept whatever option suggested first, without looking at lower return and taking cover which is not required.

Solution: Do not make investment on tight deadlines. Stick to asset allocation based on age, you risk appetite and goal timeframe.

  • Mind remembers most recent events:
Effect: You are more likely to invest in instruments on the basis of recent returns and not consider the market cycles.

Solution: Instead of going with the recent months returns spend time in studying the consistency of the performance over the past years as well as its future prospects.

  • Mind distorts information in aligns with the existing beliefs and deletes information that does not align.
Effect: If you believe in some asset classes, you are more likely to focus on only positive aspects of the same and ignore the negative aspects about it like low return and less liquidity.

Solution: while consulting an expert do not seek answer only related to your self beliefs.  Seek and consider contrary views to arrive at right decisions.

Learn and be wise money-wise.  Happy investing.

~Kishore S Hegde , Chartered Financial Analyst (ICFAI)

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