By Amit Grover
Some of the fatal diseases of the last century were pneumonia, TB and diarrhoea. Today, more individuals die due to stress and lifestyle-related diseases. Studies show financial stress is one of the major causes of stress. Most self-help gurus and many books focus on how to be happy. That’s the wrong approach. The continuous desire for pleasure or positive experience is a negative experience.
The same is true with equity investment. We want to avoid volatility. But volatility is like rain. Markets have been volatile, are still volatile and will continue to be volatile. Making peace with your negative experience is a positive experience. In the same fashion, rather than worrying about volatility, one should embrace it.
Sometimes, common sense tells us what statistics cannot. Every businessman wants to be successful, but it’s not possible for everyone to be so. It’s also not necessary that existing successful companies will keep winning. Every invention, sooner or later, would lead to a counter-invention. Every success contains the seeds of its overthrow. Every supremacy comes to an end.
In nature, the hunter and the prey keep on evolving. Competition keeps on throwing up new players and new winners. One can reduce one’s worry by investing in a well-diversified portfolio.
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It’s often said that one should be greedy when others are fearful. And one should invest in equity when there is blood on the Street. But how can one invest when the blood on the Street, when it is our own blood. We are emotional beings. We are fearful when others are fearful. That’s why one should have fixed income and right asset allocation in the portfolio.
Future is always uncertain. Calendar 2020 reinforces this point. We should buy stocks so that we can eat well in the future, but at the same time, we should buy bonds so that we need to worry less. Should one buy a house and pay EMIs for next 20 years or stay on rent is a very personal question. In personal finance, there is no one size that fits all. One can be 80 years old and have majority of his portfolio in high risk assets. On the other hand, one can be 30-year old with a safe portfolio.
We all have unique goals. So the only way to worry less is by having a unique plan that suits our personal needs. People generally use historic returns as an anchor to decide future returns. Good returns of a particular asset class in the current decade is no guarantee of similar performance next decade.
Every era is unique and offers a unique set of risk and returns. There have been decades of no to negative returns in equity. There can also be long periods of low interest rates. Equity has the potential to beat inflation in the long run. But no one can say how long. One should design a plan assuming the worst-case scenarios. One will worry less if the expectations are low.
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An optimistic person designed a car, a pessimistic person designed the seat belt. One should be a bit of pessimistic here. One should think about losing job or having a loss in his business, falling sick, having a prolonged recession or a market crash.
Being pessimistic helps save and invest more. Investing is not a like a James Bond movie, where we have to live on the edge all the time and assume that nothing wrong can ever happen. To reduce the worry, one would be mentally and financial prepared for all scenarios.
In the book Everybody Lies, they have shared an example wherein Netflix used to ask its users for a wish list. People would list out intellectual aspirational movies they would never watch. Netflix stopped asking and started predicting instead.
When it comes to investment, we should stop lying to others and oneself. We want to sound intelligent, while discussing money with friends, relatives and colleagues. Simple ideas of mutual funds, SIP, asset allocation create a blockbuster experience.
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Most of us are going to be average in most of the things we do. Our energies are limited, and we can be good in only a few areas of life. Studies show there is a big gap between market returns and client portfolio returns. We do crazy things in our constant desire to beat the market and end up losing money. It’s OK to get benchmark returns. One can achieve this by investing in passive and active mutual funds.
In the book Emotional Intelligence, author Daniel Goleman says success in life is 20% intelligence and 80% emotional intelligence. Emotional intelligence depends on one’s ability to be self-aware and self-regulate.
Delayed gratification, avoiding constant comparison with others, finding contentment with current wealth, resisting the temptation of gambling and speculation are all parts of emotional intelligence. In investment, the best investors know the benefit of not touching their portfolios for decades.
These investors are not lazy. They understand the value of doing nothing. As part of our evolution, our emotional part of the brain was developed first followed by rational part.
Money is an emotional subject; developing ones emotional intelligence with continuous practice is a good way to reduce worry.
(Amit Grover is AVP for Learning & Development at DSP Investment Managers. Views are his own)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
