Like every crisis the current crisis is also unique: it began as a medical/humanitarian crisis and soon became an economic one.
By Umang Thaker
Systematic investing through SIP in mutual funds has become a buzz word for many savers – however, keeping the discipline of regular investments especially during a crisis requires a certain level of tenacity. Investors often encounter the ‘urge to sell’ at the first sign of trouble. This is more behavioural than analytical. The irrationality in the decisional making arises due to some inherent biases – which cognitive psychologists have studied in detail. They have termed it ‘Loss Aversion’. Researchers Kahneman and Tversky first explained ‘Loss Aversion’ in their 1979 paper Prospect Theory: An analysis of decision under risk.
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Simply put – humans have higher memory of losses compared to gains – and this is encapsulated in the research as ‘losses loom larger than gains’. And they do. A 10% loss seems far more painful than a 10% gain.
Now add to this the natural instinct based response mechanism of ‘fight’ or ‘flight’. Since you cannot fight the stock markets, it is only natural that one would resort to flight.
So, is there a way out – or are we simply helpless slaves of behavioural biases and inherent response mechanisms?
The good news is that you can cultivate a certain degree of tenacity by appreciating that returns are as much a function of markets as they are of your behavior.
Howard Marks says: Investment markets make the pendulum-like swing
- between euphoria and depression,
- between celebrating positive developments and obsessing over negatives, and thus
- between overpriced and under-priced
“The pendulum refers to mood swings in the markets, up and down, as in cycles. The midpoint of the pendulum is the “on-average” point, although it spends little time at this point. That’s because it normally swings up or down, away from its extremes.” This oscillation is one of the most dependable features of the investment world, and investor psychology seems to spend much more time at the extremes than it does at the “happy medium.” – Howard Marks
Investors who continue their SIP Journey accumulate more units during corrections. The same units create a disproportionate advantage during good times. Hence during corrections – Do not just SIP, GULP.
Let your behavior traits win, not the market movement
Stock market crashes are best handled by 3 important behavior traits:
Vision to see: Stock market crashes are marked by a high level of noise about the present and the near-term future. This is where a clear vision of the long term future proves handy
Courage to buy: The courage to buy when the whole world is fearfully selling actually arises from the above vision to see itself
Patience to hold: Only those investors will emerge successfully from market crashes who have full conviction in their vision and high level of patience to see it become a reality
Like every crisis the current crisis is also unique: it began as a medical/humanitarian crisis and soon became an economic one. One might wonder that in March’20 when the case count in India was far lesser – why did markets correct so sharply? And now with a far higher case count, why have markets recovered a large portion of the losses? Is this the start of a new rally – why did I stop my SIP?
The probable answers lie in understanding the way humans deal with grief causing change. Psychologist Elisabeth Kubler Ross first described the ‘five stages model’ when she was studying terminally ill patients in 1969. By the turn of the century, the five stages model was used to understand individual responses to all kinds of change.
The five stages described by Kubler-Ross are:
4. Depression and
Kubler-Ross, in fact, called it defense mechanisms or coping mechanisms that we need to move through in order to manage change. He who is trapped, in any stage, without reaching the fifth stage, remains in fear, disappointment and uncertainty of the future.
As we limp our way back to normalcy, acceptance of the disease-causing virus and necessary changes in habits will become a ‘new normal’. We are likely to see normalcy in our investment behavior too. And like after all previous crisis, economic activity does rebound and so do financial markets, we have reason to be optimistic. If you are investing through SIPs then the next few months will offer the volatility which is likely to benefit you by giving you an opportunity for value averaging.
In conclusion, if you invest when markets are booming and chicken out when markets turn bad you will always get poor results from your equity investments. So let your patience decide the course of your SIP journey, not market movements”.
(Umang Thaker is Head of Products at Motilal Oswal AMC. The views expressed are the author’s own. Financial Express Online does not bear any responsibility for their investment advice.)