Your plan, and not what the market is doing, should drive your behavior.
Buy stocks when the prices are low, and sell when they are high is one investment advice which is clichéd, misunderstood and abused.
Abused. Because I can quote reams of data and statistic on how investors behave quite the opposite.
Be it any asset class, be it any corner of the world, investors pump in money when the market tops and push the panic button and exit when it tanks.
Abused. Because it says low - yet we wait for the lowest. It says high - and we wait for the highest. Timing the market is typical bad investor behavior. A behavior gap.
We met a prospective client a month post demonetisation, who was anxious and indecisive. “I am too worried to take any decision right now. The markets are too volatile. Let’s wait for markets to ‘clear up’ and then go ahead with things.”
But what does clear up mean? Does it mean when people are less fearful? Does it mean when the news reports are positive? Does it mean when our friends are investing again?
Keeping all of these signs in mind, do you you think the market will move higher or lower when things 'clear up'?
Higher, of course. So this decision to wait until things 'clear up' sounds like a plan to sell low and buy high on purpose. It’s a bad idea and an avoidable mistake.
So how do we stop the madness and avoid the same mistakes again next time the market goes down? (And it will go down again, I promise).
Carl Richards has this simple ‘Plan-Process-Product’ checklist that could be the answer:
Have a plan. I am not talking about one of those worthless, two-inch-thick books. I’m talking about the process of sitting down and deciding where you are today, where you want to be in the future and how you plan to get there.
Decide if that plan means that you need to invest in stocks in the first place. It might not. Your plan could involve saving more, adjusting your goals or retiring later. The rate of return you need to achieve your goals is just one variable to consider.
Find investments to populate the plan. This comes at the end of the process and is certainly not the first part. After all, you would never spend time deciding what car to drive on a trip until after you decided where you were going.
Make changes only if the plan changes. Your plan, and not what the market is doing, should drive your behavior.
We don’t know what comes next for the market, so we need to focus instead on the process of getting from where we are today to where we want to go.
It’s the only part of the process that may give us some control.
Be happy, be rich!
Amar Pandit is founder, HappynessFactory.in
Illustration: Uttam Ghosh/Rediff.com