We discuss 5 common mistakes investors make in volatile markets
Investors make these common mistakes on getting unsettled when prices rapidly move up and down
Prices constantly move in markets
Only rapid movements in a short time get noticed by investors who also get unsettled
Such market conditions often end up influencing investors to make wrong decisions
In volatile markets, most investors overestimate the risk of losing everything
This is the reverse of their expectation in rising markets of constantly gaining
Fear of losing everything is unfounded especially for investors with diversified investments
In volatile markets, Affect Bias creeps into the investment behaviour
Current circumstances, make you believe an investment is more, or less risky, than it actually is
Basically, emotions are taking over investment decision making instead of being dictated by information and logic
Most mistakes investors make in volatile markets are due to emotions taking over decision making
Like always, investment decisions during volatile markets need to be based on accurate information and logic
On most occasions, volatile markets require no action by you since they are temporary conditions
Investors end up acting simply because of being taken over by emotions
Apart from knee-jerk reactions, investors overlook financial goals in volatile markets
Ask yourself how the current volatility going to affect your financial goal
Savings for long term goals typically remain unaffected by short term market volatility
Any action during such periods would be adjusting the risk by rebalancing the portfolio
Excessive and higher than normal risk investments made during market bull runs can be pared in volatile markets
Rebalancing can be done with investments in other investment and asset classes
Investors get impacted by the Herd Mentality Bias
They end up buying and selling what others do
A little analysis or introspection helps investors realise that they don’t need to follow others
Any action required will specifically pertain to a person’s investments and financial goals
A key question before any major sell off in volatile markets is whether the money is required soon
If not, there is no reason to sell
More volatile the investment, greater the chance of making a loss after sell-off in volatile markets
Excessive monitoring in volatile markets leads to flawed decision making due to anxiety
Investors also get impacted by Loss Aversion Bias
In such markets, aversion to losing Rs 1,000 is far more than that of gaining Rs 1,000
This makes investors pare or totally exit high growth investments needed for substantial savings for major goals
High growth investments like equities witness volatility in the initial years
In the long term, they provide higher returns than alternatives
Premature exit from growth investments in volatile markets often leads to long term financial damage
It prevents you from making the most of growth investments
Avoid the common mistake of making premature exit in order to make a market re-entry in better times
This almost always fails
With regular investments like Systematic Investment Plans (SIP), you do well regardless of market conditions
Regular investments help you avoid dangers of timing the market and unwarranted pessimism
Disrupting regular investments in volatile markets makes you lose out on time needed for substantial savings
On re-entry you will have to either invest more regularly or take higher risk
Premature exit is making you vulnerable to even more risk
Volatility helps regular investments as in Systematic Investment Plans of mutual funds
You buy more units when the market is low and less units when the market is high
Average cost of buying units goes down in the long term
You need to have an investment approach that works across market conditions
Risk needs to be managed by changing the overall risk level from the mix of investments