Don’t Let Emotions Rule Your Stock Market Decisions

Our own emotions such as fear and greed can sabotage our profits. Even experienced investors can easily fall prey to their emotions and resort to impulsive moves during market upturns and downturns, which may spell disaster for their portfolios. However, for a long-term investor, controlling one’s emotions is one of the most critical factors to achieving success. For that, you must know the kind of emotions that can hit you, and the strategies that can help you overcome them. We give you a lowdown on both these aspects.

5 Emotional Pitfalls

Giving In To Fear: When markets tumble, which has been the case recently, the fear of losing money grips investors. For fear of amplifying these losses, many investors panic and sell their holdings in a rush, locking in losses. This behaviour may assuage their fears in the short term, but also leads to losing out on the opportunities. For example, when the market crashed in March-April 2020 on the negative news of the Covid pandemic, investors who withdrew their money would have missed the gains they would have made during the subsequent rebound.

Giving In To Greed: This usually happens when the markets are on a rising trend. There’s positive energy in the market during such times, leading investors to buy more, on the back of the huge profits they may have made. What investors don’t realise is that they may be accumulating stocks or mutual fund units that may be highly priced or may be at their peaks, riding on the positive stock market wave.

Just before the 2008 crash, markets were on an all-time high then. Investors who were not cautious kept buying, only to see their gains eroded after the crash. Usually, it takes time to recover losses from such crashes.

Chasing Fads: Greed also leads investors to chasing fads. This has happened many times in the past bull phases. Investors have rushed to buying initial public offers (IPOs) of companies based on positive trends without checking their fundamentals. Some of the startup IPOs in India drew a lot of attention and subscription, and left investors high and dry when they listed at a discount.

Being Overconfident: This usually happens with those who like trading versus long-term investing. Retail investors who make gains in their first few trades often start to believe that they will be able to keep winning in subsequent trades as well. Such overconfidence to outsmart the market can be dangerous as it leads an investor to get into more trades. The higher the number of trades, the higher will be the chance to make mistakes and lose. It is established that trading leads to losses more often than gains. According to a 2024 study by capital markets regulator Securities and Exchange Board of India, 9 out of 10 active traders (especially in derivatives) lost money in a year, with an average loss of Rs 1.1 lakh.

Following The Herd: It is natural to think that something that everyone is after must be safer and profitable, but in markets such herd mentality can spell doom. It doesn’t make sense to buy just because everyone is buying or sell when everyone else is selling. When doing so, there is the risk of entering or exiting a stock at the right time. For example, if everyone has already bought a stock, and you want to follow their footsteps, the right time to buy that stock may already have gone. Buying an overvalued stock will not benefit you, as once it reaches a peak, it is unlikely to outperform.

How Not To Give In To Emotions

It’s human to give in to your emotions, but if you have built a steady path for yourself to traverse, it will be easier not to stray from that.

Do Goal-Based Planning: Setting a goal and having a financial plan, which helps you identify how much you should invest on a regular basis, helps. Any market temptation will not matter if you stick to that plan. Automating investments such as through systematic investment plans (SIPs) also helps a lot because you won’t have the option to invest that money elsewhere if it gets deducted straight from your account as soon as your salary is credited. Having financial goals will also encourage you not to take unwanted or huge risks with your money for fear of losing track.

Know When You’ll Buy And Sell: If you invest a certain portion in the markets regularly, laying certain ground rules can help. For example, buying when the markets are down can help you accumulate quality stocks at a lower price. Similarly, you can track a stock and accumulate it when you think the valuation is right. At the same time, have an exit strategy as well in consultation with your financial advisor. For example, if negative news hits a stock in a way that it raises questions on its fundamentals to the extent that it’s unlikely for the stock to recover, that may be a sign for you to exit.

Allocate Wisely: If you have a well-diversified portfolio, it will not get too affected by market moods. When equities hit a rough patch, other assets may come in to act as a buffer to maintain the overall portfolio value, and vice-versa. When you see that your portfolio is stable, you may not be tempted to, say, sell in a falling market. Spread your investments across asset classes (equities, debt, gold, etc.) and across many stocks or funds. When you find the asset allocation skewed, you can always decide to buy and sell, depending on how far your goals are and how you are placed financially. As a result, you will take decisions depending on your portfolio movement and situation, and not based on emotions.

The markets are dynamic and if you are able to master your emotions, you will have an edge. But you also need to work hard to be able to do that and that may mean cultivating another type of emotion—patience. When you are investing in equities, it’s wise to have a long term perspective, and to ensure that, you need to be patient, and not react to market ups and downs. This comes with discipline and may take time to cultivate, but it will happen once you see your portfolio cruising unharmed through different market situations. A financial advisor can handhold you to achieve this state.

Article is contributed by ICICI Securities Research Team | This is not an Outlook Money feature

Disclaimer

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