There is no great secret to investing in volatile times. Imagine the situation of a person who is doing a Recurring Deposit in a bank…does he/she think what are the interest rates prevailing?

No. He just does his RD.

Why does he invest/save?

Because he/she has money to invest they do a RD. However equity investors get into a mind set of ‘I will not do SIP’…and the reasons could be:

1. Market is too high or 2. Market is too low.

to me both reasons look stupid. Also for long term money to be kept in debt sounds funny…from a current yield/ ytm point of view. Yes if it is money for 2-4 years, can still understand debt option, or treating it as a corpus for annuity withdrawal….not if it is money for 30 year goals!

So simply do your SIP…at some time in the future you will look back and say “Man in 2011 the markets were at 17000, it was a great time to be picking stocks, now the index is 34000′. And it may not be more than 5 years away .

Remember markets gave an outstanding run from 3k to 21k in 5 years..the excess has to soaked up so that the  markets can do a ‘Regression to the Mean’. This means if you take the returns from Indian equity markets from 2002 to 2032 it may show an average of say 16%p.a. So obviously the 2002 to 2007 super high returns will have to be reduced..so that the average catches up! As a common investor we have no clue whether this grind will take the sensex to 15k and then come back to 21k or go down to 12k and then bounce to 25k. Well I do not know, and those who know are not telling me. Nor are they telling you on the TV channels, so it is a secret which only Mr. Market knows.

So what can you do in the interim period? Stop worrying about negative interest rates (interest rates 10%, inflation 12%), slow grinding up / grinding down equity markets, volatile markets, falling dividends, poor Q3 results….and continue your SIP. For the common man it works.

Anil Rego (SIP article on Moneycontrol) and Sandeep Shanbag (Investing in volatile times article on Moneycontrol) are saying similar things.

Funny thing is all of us must have said similar things earlier also…please go out there and listen. You do not need to read so much about personal finance – doing it is far, far more important. So like Nike says

Just Do it.

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Leaving emotions out of your financial decisions is tough. Behavioural Finance is a science that gauges among other things, the rationale of investment decisions. UTVi talks to PV Subramanyam (Subra), financial trainer on the subject and discuss how being unemotional is crucial in matters of finance, especially in these volatile times.

When there was a flutter about ICICI bank, people started breaking their fixed deposits… taking their money out from their accounts… Earlier with the Tsunami, real estate lost favour… People started withdrawing from it. We tend to take investment decisions in panic…

Subra: If a person is serious about his equity investments, he will be emotional about it. It is difficult to say buy a share and not be emotional about it. If you have all your money lying in ICICI bank and you feel there is a problem with the bank you WILL panic.

Do you see people facing losses because of hasty decisions?

Subra: Actually, people do face losses because they react to such kind of news. Either they react a little too early or a little too late.

Markets have come down from 21,000 levels to 8,000. Analysts are saying that it is the right time to buy. But investors are into panic selling…

Subra: That is typically how people react. First, when the market came from 21,000 to 18,000, there was denial… you say this is temporary… At this point, you need to say I will invest in a disciplined manner than react to market prices.

There has been a study on the behaviour of people’s investments as far as their financial investments are concerned…. it’s called Behavioural Finance. This is applied from psychology to see how people react to financial situations. There are certain things like mental accounting. Your mind tends to make you feel good. So when things go wrong your mind tells you that this was your broker’s mistake… the market’s mistake… So you keep fooling yourself that you are very smart, and that you will never go wrong.

Vikram Oza: Don’t people react to panic situations when they don’t know what the future holds, because of that uncertainty, they say, better be safe than be sorry?

Subra: There are two situations. One is to be safe than sorry, the other is to consider what would others think… In a panic situation you should look like you have tried. And you fool yourself by saying ‘I have got rid of all my shares at 9500’. When market goes to 9000, you suffer from confirmatory bias… You say, I knew that the market will go down and the market HAS gone down from 9,500 to 9,000, you think you are very smart. What you have missed is the journey from 21,000 to 9,000. And when the market goes from 9,000 to 11,000, you have already lost the so-called ‘gains’. At 11,000, you say the markets will come down to 9,000 and then I will buy… the rise may  be sudden and stunning!

Keeping all that in mind, if I want to remove emotions out of all my investment decisions, what do I need to do?

Subra: Just go out and invest in some notebooks. Write down in your notebook what you are buying and why you are buying. Write down the emotions part of it. Maintain a personal investment diary and write down all your investments in an excel sheet. See, how much you are earning. Six months later your 200 page notebook will show you what you have done. If you have done very well, good… continue doing it. But, if you are underperforming the index, underperforming the fund managers, don’t invest directly in equities, put your money in mutual funds, in SIPs or in some kind of automated trading. Look at your asset allocation, like how much of your money should be in equity and how much in debt. A Systematic Investment Plan (SIP) completely removes emotion.

Do you approve of automated systems? …Using machines to make your equity investments, would it help?

Subra: Your emotions are completely removed when you use automated systems. In these volatile times, especially, if you are a buying guy, you have to continuously keep buying and selling. In this case, you are much better off giving this to software which is well written. But remember behind the software, there’s a human who has written it logically as to what you should do when the markets are down and all this is thought of and written unemotionally. Even automated systems cannot protect your capital entirely.

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http://www.utvi.com/personalfinance/financial-investment-india/15714/investing-sans-emotion.html# – is where the original is, for the others, here it is being reproduced!

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