Earlier, in my blog post 'Biases That Can (Badly) Hurt Your Personal Finances', I had listed many behavioural biases that can hamper our good financial judgement and decision-making.
As discussed, emotions can seriously distort our logical thinking process. This can often lead to wrong choices. Consequently, we either earn poor returns on our investments. Or worse, even lose money!
Lastly, it was concluded that we need to design our investment processes, such that the (damaging) role of the emotions and instincts is either nullified or minimized.
Let's explore the many ways to control and conquer our irrational behavioural biases and emotions.
Beware! Avoid such limit enhancements.
Instead, restrict your credit limit to the minimum required for your everyday needs.
It won't be easy to control your implusive spending habits. So, you need to control the limits. Lower credit limits will ensure that your wasteful expenses cause only a 'limited' damage to your finances.
Therefore, you must get rid of your money as soon as it lands into your account. Start SIPs in mutual fund. Open a Recurring Deposit account in your bank. Pay insurance premiums at monthly intervals.
It is a proven fact that we can't resist temptations. However, if there is nothing much left in the bank account, the useless spending drops automatically.
Likewise, it is foolish to assume that we will NOT invest in equities when the markets are booming.
Yet, logic tells us that we should be doing exactly the opposite. But as we now know, it is (really) difficult to make logical choices.
Rebalancing is the solution to this emotional drama. Always maintain an appropriate equity-debt asset allocation. When your portfolio becomes overweight on equity, sell equity buy debt. Similarly, when your portfolio becomes overweight on debt, sell debt buy equity.
Fear and Greed are almost impossible to overcome. Rebalancing ensures that the 'Buy Low Sell High' strategy is automatically implemented.
By the way, if someone was really good in astrology or numerology, he would be busy making money. Why would he waste his time doling out astrological predictions? Think about it!
Well, here all you have to do is to start SIPs and just forget about them.
Thereafter, you can have all the fun in predicting the markets. But at least your investments are happening every month, irrespective of what the markets are doing. And, sooner or later you will be suitably rewarded for this discipline and patience.
Even though we have ample experience of mutual funds delivering good results, we still want to try our luck by investing directly into stocks.
Well, go ahead and gamble. BUT... with only 5% of your money. Give the balance 95% to the fund managers.
Your gambling instincts are satisfied. Most probably you will lose all this money. But at least, 95% of your money is relatively safe in mutual funds.
However, weak stocks will never recover. In fact the slide will continue, till almost the entire capital is wiped out. Even the best of the stock market experts have a few such dud (and dead) stocks in their portfolio.
The only solution is to instruct your broker to sell, the moment the price is down by 10-15%. No waiting and watching under any circumstances. Stop-loss should be STRICTLY applied, come what may. You can always re-research the stock and buy it at lower prices, if you really think that it deserves to be back into your portfolio.
This will make your equity portfolio a lot more cleaner and profitable.
You all are intelligent and smart. So I am sure that you can definitely think of many more ways to bypass and con your emotions.
The bottom line is that emotions are the main culprit behind many financial problems.
Therefore, shift your focus and efforts.
Don’t waste your time on the symptoms. Rather go to the root cause and deal with the behavioural syndrome itself.
As Indira Gandhi always insisted "Have a bias for action — let’s see something happen now."
As discussed, emotions can seriously distort our logical thinking process. This can often lead to wrong choices. Consequently, we either earn poor returns on our investments. Or worse, even lose money!
Lastly, it was concluded that we need to design our investment processes, such that the (damaging) role of the emotions and instincts is either nullified or minimized.
Let's explore the many ways to control and conquer our irrational behavioural biases and emotions.
1. Limit your credit card limit
Typically, we want more and more spending limit on our credit cards. As and when our incomes go up, we request the banks to increase our credit limits. Or, when banks offer to increase our limits based on our credit history, we readily agree for the same.Beware! Avoid such limit enhancements.
Instead, restrict your credit limit to the minimum required for your everyday needs.
It won't be easy to control your implusive spending habits. So, you need to control the limits. Lower credit limits will ensure that your wasteful expenses cause only a 'limited' damage to your finances.
2. Automate your investments
The longer the money stays in your bank account, more are the chances of it getting consumed. And, more spending is equal to less savings.Therefore, you must get rid of your money as soon as it lands into your account. Start SIPs in mutual fund. Open a Recurring Deposit account in your bank. Pay insurance premiums at monthly intervals.
It is a proven fact that we can't resist temptations. However, if there is nothing much left in the bank account, the useless spending drops automatically.
3. Rebalance your investments
It is foolish to assume that we will invest in equities when the markets are crashing.Likewise, it is foolish to assume that we will NOT invest in equities when the markets are booming.
Yet, logic tells us that we should be doing exactly the opposite. But as we now know, it is (really) difficult to make logical choices.
Rebalancing is the solution to this emotional drama. Always maintain an appropriate equity-debt asset allocation. When your portfolio becomes overweight on equity, sell equity buy debt. Similarly, when your portfolio becomes overweight on debt, sell debt buy equity.
Fear and Greed are almost impossible to overcome. Rebalancing ensures that the 'Buy Low Sell High' strategy is automatically implemented.
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| Stop being a victim to your biases and make (more) money. |
4. Prediction vs SIPs
More than researching stocks, we believe in market forecasts. This syndrome of 'addition to prediction' has been the cause of many disasters at the stocks markets.By the way, if someone was really good in astrology or numerology, he would be busy making money. Why would he waste his time doling out astrological predictions? Think about it!
Well, here all you have to do is to start SIPs and just forget about them.
Thereafter, you can have all the fun in predicting the markets. But at least your investments are happening every month, irrespective of what the markets are doing. And, sooner or later you will be suitably rewarded for this discipline and patience.
5. Gambling instincts
We all want to become millionaires overnight. We all want to overnight double our money at the stock markets. That's why we love penny stocks. That's why we play the leverage game in Futures and Options. All this, of course, with disastrous results.Even though we have ample experience of mutual funds delivering good results, we still want to try our luck by investing directly into stocks.
Well, go ahead and gamble. BUT... with only 5% of your money. Give the balance 95% to the fund managers.
Your gambling instincts are satisfied. Most probably you will lose all this money. But at least, 95% of your money is relatively safe in mutual funds.
6. Automate your losses
As discussed, we all are averse to losing money. Therefore, when our stocks are down we don't sell. We hold on in the hope that it will recover soon. Sometimes, we try to buy more at lower prices to average the costs.However, weak stocks will never recover. In fact the slide will continue, till almost the entire capital is wiped out. Even the best of the stock market experts have a few such dud (and dead) stocks in their portfolio.
The only solution is to instruct your broker to sell, the moment the price is down by 10-15%. No waiting and watching under any circumstances. Stop-loss should be STRICTLY applied, come what may. You can always re-research the stock and buy it at lower prices, if you really think that it deserves to be back into your portfolio.
This will make your equity portfolio a lot more cleaner and profitable.
You all are intelligent and smart. So I am sure that you can definitely think of many more ways to bypass and con your emotions.
The bottom line is that emotions are the main culprit behind many financial problems.
Therefore, shift your focus and efforts.
Don’t waste your time on the symptoms. Rather go to the root cause and deal with the behavioural syndrome itself.
As Indira Gandhi always insisted "Have a bias for action — let’s see something happen now."
