Why Chasing Short-Term Gains Over Long-Term Profits Can Hamper Your Financial Decision-Making Habits

Monitoring market fluctuation is a common practice that mutual fund investors and stock traders undertake. It allows them to estimate the positive or negative results of their investment, thus helping them take timely decisions, and avoid major losses.  

However, often times, it becomes an anxiety trap, leading to obsessive and impulsive decision-making. When it comes to making financial decisions, one should think of long-term gains. However, many investors make the mistake of chasing short-term gains, leading to more loss of money instead of gain. 

Regular monitoring of mutual fund performance can lead to anxiety, as investors may develop emotions tied to short-term fluctuations. Markets are unpredictable, and investors may make knee-jerk reactions driven by fear or greed. This emotional ride can make it difficult to stick to their long-term financial goals, when anxiety creeps in. Researchers suggest investors should be mindful of their investments’ worth and avoid emotional reactions that may lead to anxiety. 

Says Sakchi Jain, chartered accountant, “Frequent trading can lead to missed opportunities for long-term market appreciation and compounding.”  

She says it can also cause emotional stress, burnout, and regret. Thus, to avoid these issues, investors should focus on long-term financial goals and minimise reactive behaviour. Reacting to short-term market movements can result in sub-optimal financial outcomes and emotional distress. She proposes investors to “focus on long-term objectives to enhance financial well-being and reduce emotional stress associated with market volatility”. 

Hurting Long-Term Strategy And Cause Of Stress 

Mutual Funds are long-term investments that are meant to return consistently over time. However, daily check-ups on their performance can lead to short-term thinking and impulsive actions, hurting your long-term returns. 

Successful investors know that staying on the course and focusing on long-term goals is the best way to maximise returns. Emotional reactions towards losses and gains can drive investors from thoughtfulness, making them greedy or fearful rather than making informed judgments.  

Overreacting to daily changes can disrupt well-thought-out financial strategies and lead to loss-making trades in the long run. Instead, investors should focus on their long-term goals to maximise returns. 

Successful investing requires time. Mutual funds perform best when left alone, benefiting from compounding returns. Instead of obsessing over short-term market noise, investors should focus on bigger trends in your life, such as regularly contributing to their investment or rebalancing their portfolio, as required, says Jain. 

How To Practice Controlled Trading? 

To manage financial goals and manage mental health, one should ideally set a schedule to review their finances on a quarterly or a half-yearly or annual basis, rather than daily or monthly. One should keep oneself updated about market and economic conditions but shouldn’t let that influence his/her emotional state. One may also seek professional advice in this regard. 

It is important to note that patience is key to successful investing, as mutual funds require discipline and patience.  

Expert Opinion 

What Is The Ideal Intervals For Monitoring The Market? 

Frequent monitoring can lead to impulsive decisions driven by short-term market movements. As such, it’s essential to focus on long-term objectives and avoid reacting to daily market volatility. The ideal frequency for reviewing your mutual fund portfolio depends on your investment objectives, says Jain.  

“For equity mutual funds, conduct reviews every 6-12 months to ensure that the fund’s performance aligns with your financial goals and risk tolerance. For debt mutual funds, a quarterly review is advisable, especially in fluctuating interest rate environments,” she says. 

Is There Such A Thing As Over-Trading? 

Over-trading refers to the practice of excessively buying and selling securities in an attempt to capitalise on short-term market fluctuations. Over-trading often results in lower net returns compared to a disciplined, long-term investment approach.  

However, this behaviour can have several negative consequences:  

• Frequent trading incurs higher brokerage fees and taxes, which can erode overall returns. 

• Constantly reacting to market movements can lead to decisions based on fear or greed rather than sound investment principles.  

• Short-term capital gains are taxed at 20 per cent for assets held for less than one year, which is higher than the 12.5 per cent tax rate for long-term capital gains (LTCG) on assets held for more than one year.  

What Are Some Drawbacks Of Frequent Portfolio Rebalancing? 

While rebalancing is essential to maintain your desired asset allocation, doing so too frequently can be detrimental. Jain highlights the following consequences of the same:  

• Regular buying and selling can lead to increased transaction fees and tax liabilities.  

• Selling investments prematurely can interrupt the compounding process, potentially reducing long-term gains.  

• Frequent adjustments may lead to chasing past performance or reacting to short-term market noise, which can harm long-term returns.