The title of the article may sound like a chapter from a psychology book. But hardly is it academic in nature. This time around, we would take a look at what goes on in our minds before we take any investment decision.Investment decision making is like a coin with two sides – one which is about about facts, figures, objectivity, planning & so on. This is the heads side of coin. The other side is about how we are, our emotions and our behavior. For most of us, our coins don't often land up as heads. Let us then see at ourselves and look at these behavioral patterns more closely.

Personal Business:
Everyone has a favorite. And the good thing about having favorites is that you tend to know more about them. In investments too we have our favorites and that it where we would be mostly investing. For some it may be equity, for some bank fixed deposits and for some, insurance plans. But the problem really starts when we tend to ignore other better options while feeling comfortable with our choice. Statistics show that a majority of the investors tend to invest only in one, two or at most three products for a particular purpose. Also we tend to be skeptical about new investments and unconsciously find reasons to reject the new ideas. As investors we should always be open for new ideas and investment avenues but not necessarily adventurous.

Herd Behavior:
Another behavior commonly observed is herd mentality. We often tend to follow others believing that what everyone is doing is right and thus going with them wouldn't harm us. This approach reaches an extreme when we know that something is not right but we still go through it believing that everybody is doing it so when something goes bad, you will not be alone. The sense of our loss becomes less hurting when we know that others have lost too. We also don't want to stand out in a crowd and do things which most of our friends, family members have not done or are not comfortable with. While making investment decisions, this approach or behavior is something we must avoid. If everyone is saying that 'x' is bad or 'y' is good, it needn't be so. Evaluate your decisions independent of what others are doing or saying.

Impatience:
With changing times and growing use of technology and other services, we are now spending less time for things that used to take hours before. The fast paced life has also made us more result oriented and impatient in many things, investments being one of them. However, within investments too, we tend to be more impatient and demanding out of few investment avenues, like equities, while being very easy with others, like say fixed deposits. Playing a good dad or bad dad to different investment avenues is not good. Often impatience leads us to make compulsive decisions, which may not be beneficial. Every asset class is suited for a particular time horizon and equities are for long term. So let us avoid checking our investment every now and think what the remaining money can do for us.

Pleasing others and self:
There are also a few among us who are good samaritans. Being good means that you take decisions knowing it may not be best suited to you, just to please or benefit that other person. It is not easy for you to say no. There may be may motives behind this like say relationship, financial assistance, ego or simply charity. But does acting on recommendations by persons, to whom you can't say no, make any real difference to anyone? In doing so, many a times, we also unconsciously are trying to please ourselves and feel good about making such investments. We must learn to say no to investments until we are not very sure about, irrespective of who is behind it.

Not asking questions:
There are also few among us who are not in the habit of asking questions. When any investment idea is proposed, we often just ask a few customary questions often beginning with “How is it?” Reasonably satisfied with replies, we rely on the trust and relationship of our adviser who is helping us. Surely, your adviser is acting in your interest, but wouldn't it be really a lot more worthwhile if we could ask all relevant questions before making investments? This would include questions on ideal time horizon, expected returns, risks involved, tax incidences, liquidity, operational matters, past performance, other comparative products, investment costs and so on. Make use of these questions and the next time your adviser will surely bring better options before you and also come well prepared. So next time any investment idea is thrown at you be ready to say “Tell me everything about it”.

Procrastination & laziness:
Another very common behaviour observed is that of procrastination. This impacts our financial decisions fairly regularly. Procrastination can be seen in every instance of delaying investment decisions, delaying paper work or pushing decisons to some other time. Our laziness too gets the better out of us. Often, it is because of laziness that we do avoid getting involved in proper research, study of our own needs, financial goals, investment options available and so on. Combine them and we get a deadly combination that can kill good opportunities and harm our financial well-being over time. You may not see any big impact at any point of time, but they are always there, eating away your few rupees every now and then.

Overriding emotions:
The last behavior but also the most pressing one is where we let our emotions get the better of us and impact our investment decisions. There are three emotions that we will talk about here – greed, fear & hope. Greed would be like buying when the prices have risen, looking at the past performance or the returns others have made or still holding on for more when the prices have already risen. Greed would also make us go on fishing trying to catch a big fish from a water we cannot see. The big fish or the next multi-bagger, hot tip, often does not turn up. At the end of the day, we waste more of our precious time and money trying to get one than from we benefited, even if we caught one. Fear is another big emotion to be beware of. It often makes us avoid good opportunities when markets are not doing good, for the fear of further falls. A sense of negativity prevails and we tend to believe worst is yet to come. We would also tend to sell and windup our investments in order to salvage whatever we can at preciously the time we should be acting in the opposite manner. Not only do we end up loosing money but we also end up loosing money that we could have made during these times. Any bad experience in past also makes us overly cautious and we blacklist the entire investment class for ever, often to our own loss. Hope is last of the big emotions that we pay to carry. Often it would make us keep holding in our long time, favorite investments hoping they will recover to the past highs. A sensible, objective analysis should be made each time any emotion overbears itself on our thinking. Emotions, after all, carry no value in the investment world.

Knowing and acknowledging the presence of these behavioral traits within ourselves would help us in avoiding decisions taken immaturely. The better we know ourselves, the better we can be objective in our decision making. Consciously keeping our emotions aside over time will see that our investment coins lands heads up more often than not. It is this process by which you graduate from a normal investor to a smart & shrewd investor.

We live in a dynamic, evolving, uncertain world. The investment landscape is too constantly changing with uncertainty being omnipresent. The wisdom to know what to do and how to act in the face of this uncertainty will decide who and what will succeed or fail. This is the reason we must time and again go back to the fundamentals of investing, especially equity investing.

Presented here as commandments, these are the ground rules and behaviour which suggest specific actions to pursue or avoid. The 10 commandments distil the collective wisdom of investment gurus and are timeless in their relevance and importance, and we need to remember it from time to time. In an uncertain investing world, the below ten commandments can help you navigate and find success as investors.

1. Thou Shall Avoid Emotional Investing

   “If you can’t control your emotions, you can’t control your money.” - Warren Buffett. This is the most important commandment and hence the first on the list. Without separating emotions from investing, none of the below commandments will be of much use. Equity markets, as many now would agree, often experience stages of fear and greed, as recently witnessed in the past few months, again. Anyone falling prey to the herd mentality is bound to make mistakes. We should refrain from the FOMO (fear of missing out) emotion and take a step back, think independently and rationally, always.

2. Thou Shall Not Forget Asset Allocation

   Smart investors always have an eye on their Asset Allocation. The next commandment requires one to have an asset allocation strategy to manage one’s overall investment portfolio. Within asset allocation, one has the option to choose fixed or a dynamic asset allocation approach, depending on your risk appetite. This can be revisited every few years or after any major life event. A regular rebalancing to restore your asset allocation, either on a fixed frequency and/or driven by sharp market movements, is all one needs to do on an ongoing basis.

3. Thou Shall Always Diversify

   Beyond asset allocation, diversification ensures that you do not concentrate your holdings and risk into limited funds or securities. Equity diversification can be across different market capitalisations (large/mid/small/mixed), fund styles (growth/value), even countries (domestic/international), etc. As compared to direct equity investing, mutual funds offer much better diversification as a single fund will invest in many stocks at any point in time.

4. Thou Shall Not Ignore your Risk Profile

   A risk profile is an assessment of an individual's willingness and ability to take risks. It is important for determining a proper investment asset allocation for a portfolio. We can think of risk as the trade-off between risk and return, which in other words is the trade-off between earning higher returns at higher probability /risk of losing capital or earning lower returns at a lower probability /risk of losing capital. We should see the risk profile as the weighing machine to avoid financial and emotional damage beyond what you can handle.

5. Thou Shall Always Have A Plan

   By failing to plan, one is planning to fail. To accomplish anything worthy in life, preparation /planning is required, even for financial well-being. Irrespective of how big or small your savings or your goals are, planning is critical to reaching your destination. A good plan identifies where you are today, where you want to go and more importantly, how to reach there. If one put it in a sequence, there are first dreams, then goals, plans, execution, course correction and finally achievement.

6. Thou Shall Follow Discipline

   Being disciplined at handling and saving money is a lifelong behavioural change. Small things, repeated many times over, over many years, can result in wonders. Being disciplined for an equity investor would mean being steady, sticking to and following your plan and not reacting to the market craziness. Often disciplined savings in equity is also promoted rather than putting all your money at the same time in the markets. Disciplined savings with Systematic Investment Plans or SIPs in equity mutual funds is a very popular approach to disciplined savings in equities, which is hard to replicate in direct equities.

7. Thou Shall Not Predict Markets

   If there is one ability which all equity investors and managers dream of, it is the ability to predict markets. Unfortunately, no one is gifted with this foresight. What is amusing is, it is easier to predict over many years rather than to predict the next day! Successful investors are not better market predictors but are more researched, they hold on to their convictions, use common sense and invest for long-term, where the probability to succeed is high.

8. Thou Shall Not Leverage

   Leveraging is the easiest and the fastest way to bankruptcy. Period. The only people who may leverage are the ‘traders’ running the business of short-term trading in stocks /indices. Derivatives, comprising  futures and options, again are called as the weapons of mass destruction and is a territory of only those who wish to take it up as a full-time business, willing to sacrifice mental peace to take up daily risks. Retail investors should clearly stay out of this world which can take away a lifetime’s savings without a day’s notice.

9. Thou Shall Not Run After Tips

   What happens when you mix equity investments with excitement? It becomes gambling. Surely, you can hunt stock market tips, buy penny stocks, bet on horse races, buy lottery tickets, all at the same affordable prices. But please do not paint all this as part of your equity investments. Buying established companies or good funds is far more predictable than buying into the unknown, fly by night, companies available at prices cheaper than chocolates or public bus tickets.

10. Thou Shall Not Make Big Mistakes

    Sometimes, all it takes is one mistake to ruin the good work done over many years. Such mistakes need not be limited to equity investing but can be in any sphere of life which can destroy your wealth. Investing in unsolicited, get-rich-quick schemes, bad property deals, business failure, unemployment, legal disputes, marital break-down, etc are many of life’s realities which not only take our mental peace but can also cost us dearly. Lack of adequate insurance for death, disease, disability and damages to property, business establishment /goods etc by far are the most common reasons behind ruining a family’s financial well-being. Ensuring safeguard against risks, being careful in decision making, creating multiple earning sources and smartly compartmentalising your investments is needed.

Our relationship with money starts at an early age when we notice or parents exchanging coins or notes for all sorts of stuff we like. The understanding of money grows as we start getting our pocket money. Slowly, we get more exposed to money and we start forming our financial behaviour and habits as we progress through these years. Once we start earning, we perhaps either continue or form new behaviour and habits, depending on our knowledge, understanding and our live-style needs. These experiences and beliefs may last throughout your life. The challenges however only multiply as we continue in our lives, have families, dependents and life goals.

Some concepts are very important when we talk of any investment journey. Having a good understanding of these concepts and ideas will go a long way in developing a strong foundation for our future financial well-being, irrespective of our age.

In this article, we will talk about 5 important concepts and ideas for wealth management. These can also be viewed as long-term strategies which, when practiced diligently, can help us strengthen our finances and reach the goal of financial well-being earlier.

1. Have an Evolving Appetite for Risk

William Faulkner said: “You cannot swim for new horizons until you have the courage to lose sight of the shore.” Investing is an art that is backed by logic. To master this, one needs to have an appetite to take calculated risks. Perhaps the biggest risk to your financial well-being is not taking any risk. Your willingness to take thoughtful and calculated risks is in disguise an opportunity to build wealth as you grow.

You must remember that to create wealth, you have to earn ‘real returns’ - returns above post-tax, rate of inflation on your investments. Anything below that is in fact losing wealth. For eg., even if you are earning say 8% on your bank FDs and fall in the highest tax bracket, the post-tax net returns would be just 5.6%, meaning with inflation at say 6%, you are reducing your wealth by 0.4% every year! Always calculate your real returns as a test.

2. Patience and Discipline

To yield good returns on long-term assets such as mutual funds, one needs to have patience. This will come from understanding the asset classes and their behaviour. There is no shortcut to success, similarly, any appreciation in assets takes time. Being impulsive and investing without adequate knowledge can lead to financial losses. Discipline when investing in equities can lead to superior returns, as ups and downs in equities is a normal phenomenon, staying invested in quality assets is key to value creation. One very good way of having discipline in investments is to invest through SIP in equity mutual funds for long term wealth creation.

3. Diversify Your Funds

The best English proverb when it comes to investing is ‘don’t put all your eggs in one basket. This is an old yet effective way to explain the importance of diversification when it comes to investments. Diversification, whilst not fully guaranteeing losses, helps spread the risk of investments to help reach long-term financial goals. Diversification can come across different asset classes and with different funds/products within a chosen asset class. Broadly the asset allocation is always between equity and debt. Some may even add gold and real estate to this equation. Diversification is dictated primarily by your risk profile, investment horizon and returns expectations. It helps provide contingency to adverse effects in one asset class. Your MF distributor or investment expert shall in a position to guide you on the level of diversification required by you.

4. Have Equity Exposure

Investment should be made keeping in mind your risk appetite. This is influenced by many factors including; life stage, income, age and experience of investment. However, for wealth creation, the equity asset class emerges as the undisputed winner amongst all asset classes. For young individuals with income, taking higher risk is recommended as compared to a retired individual with limited or no income. As said, the choice of an asset class is dictated by risk appetite and investment horizon. However, when it comes to returns expectations or required returns for achieving financial goals, the most likely outcome will be equities. There is also a lot of ease, convenience, flexibility and tax advantage while investing in equities as compared to physical assets like real estate and gold or debt investments. However, it is a more volatile /risky investment and hence prior understanding, risk assessment and guidance from experts may be required.

5. Focus on Financial Plans

Lastly, we strongly recommend having a working financial plan, always. You won’t reach anywhere, achieve your life goals, financial independence, unless you have planned it first and are regularly tracking the same. It is critical to start investing in opportunities that are aligned with your larger financial goals. One should be focused on staying on track to reaching these goals through remembering that long-term value creation takes time. Get in touch with your financial guide /expert /distributor to know more about this.