Fear and Greed are two very strong primal and instinctual emotions and they are the driving force of stock market movements. The stock market prices are the reflections of collective investment behaviour of all the investors. The investor’s emotions of “greed and fear” are contagious in nature and are responsible for the towering highs in bull market and subsequent crash.
These two emotions are the actual representation of two sides of investment risk as greed represents ready to take higher risk while fear represents appropriate management of risk by recognising it. Being calm when prices are falling and controlled when the prices are soaring heights is not an easy task for an investor. Whether a new investor or a seasoned veteran, one constantly battles these two emotions. But if one understands when to embrace or tame these emotions, a strong position can be created in meeting the financial goals.
Greed and the investor
When stock prices are showing upward trends, more and more investors get involved in buying the stocks. As the stock market is governed by the principle of law of demand and is a reflection of investor behaviour, the result is dizzying high in the bull market. High prices instigate the investor to make more profits and growing profits fuels more greed. With high demand, prices keep rising further and so does the profit. Investors get involved in booking short-term profits. At a very high level of prices, bubbles get created and as the intrinsic value of stocks are much lower than the market price, eventually the bubble burst and price crashes. Investors who buy stocks at very high prices following the aggression of the growing prices (bullish trend) in the market suffer huge losses due to the crash in the market.
Fear and the investor
When the stock market goes through the process of correction due to overpricing in the stocks, a downward trend in prices is witnessed. In a falling market (bearish trend), investors get into a panic selling mode due to their apprehension that the market will fall further, and the consequence is a sharp fall in the share prices. Investors’ fear of losing all their investment in the falling market leads to aggressive selling and as the stock market is governed by the principle of demand and supply, the market falls further.
Two to three years’ rise in share prices can get wiped out in just two to three months of a bearish trend. When markets are rising everyone wants to become rich by booking profit and get involved in buying. In a falling market, everyone starts selling to minimise their losses due to apprehension of a further fall in the market. Legendary investor Warren Buffet says, “Be greedy when others are fearful and fearful when others are greedy.” According to him, “no one wants to get rich slowly”. The contagious disease of “Greed and Fear” becomes a mammoth obstruction in the long-term goal of wealth creation.
Strategies to tackle greed & fear
Market sentiments cannot be controlled but one can control one’s own actions. So, understand the fundamentals behind your investment plan, stick to your investment plan and avoid spontaneous decisions looking at the general uptrend or downward trend of the market. Respond to the market with reasoning and base your decision on logical and rational principles.
Do not fear the risk of losing your money in the short term. Rather, be focused on the long-term gains based on the view of the company and economic conditions. Rationalise your decisions based on available information rather than being guided by greed and fear.
Greed and the investor
When stock prices are showing upward trends, more and more investors get involved in buying the stocks. As the stock market is governed by the principle of law of demand and is a reflection of investor behaviour, the result is dizzying high in the bull market. High prices instigate the investor to make more profits and growing profits fuels more greed. With high demand, prices keep rising further and so does the profit. Investors get involved in booking short-term profits. At a very high level of prices, bubbles get created and as the intrinsic value of stocks are much lower than the market price, eventually the bubble burst and price crashes. Investors who buy stocks at very high prices following the aggression of the growing prices (bullish trend) in the market suffer huge losses due to the crash in the market.
Fear and the investor
When the stock market goes through the process of correction due to overpricing in the stocks, a downward trend in prices is witnessed. In a falling market (bearish trend), investors get into a panic selling mode due to their apprehension that the market will fall further, and the consequence is a sharp fall in the share prices. Investors’ fear of losing all their investment in the falling market leads to aggressive selling and as the stock market is governed by the principle of demand and supply, the market falls further.
Two to three years’ rise in share prices can get wiped out in just two to three months of a bearish trend. When markets are rising everyone wants to become rich by booking profit and get involved in buying. In a falling market, everyone starts selling to minimise their losses due to apprehension of a further fall in the market. Legendary investor Warren Buffet says, “Be greedy when others are fearful and fearful when others are greedy.” According to him, “no one wants to get rich slowly”. The contagious disease of “Greed and Fear” becomes a mammoth obstruction in the long-term goal of wealth creation.
Strategies to tackle greed & fear
Market sentiments cannot be controlled but one can control one’s own actions. So, understand the fundamentals behind your investment plan, stick to your investment plan and avoid spontaneous decisions looking at the general uptrend or downward trend of the market. Respond to the market with reasoning and base your decision on logical and rational principles.
Do not fear the risk of losing your money in the short term. Rather, be focused on the long-term gains based on the view of the company and economic conditions. Rationalise your decisions based on available information rather than being guided by greed and fear.
Truth be told, we all commit mistakes. However, how we learn from them is what matters the most. That being said, there are a few common mistakes that could have a long-term impact on your financial health and could even put an obstacle in your journey to achieve financial freedom.
In other words, these are mistakes that you simply cannot afford to make! Prior knowledge about these mistakes could be a great help in avoiding them. I’ve listed down a few such mistakes in a bid to protect your finances from their adverse impacts.
1. Sharing critical financial details with others
Do you know that according to banking rules, even spouses are not allowed to use each other’s debit or credit cards to withdraw money at ATMs or for shopping? According to media reports, a few years ago, a bank had refused to refund money to a woman customer stating that an ATM card is non-transferrable. The woman’s husband had used her debit card at an ATM but the transaction didn’t go through due to a technical glitch. The point being, you must not share your online banking details, passwords, ATM pin, debit/credit card details, etc., with anyone. You must also keep these instruments and access details in a safe place. Similarly, you should also keep data related to your investments, e-wallet, UPI, etc., safe and secret from everybody. Any laxity in this could lead to misuse and significant losses.
2. Ignoring inflation while investing
Wealth creation is one of the key objectives when you invest in your financial goals. However, when the inflation rate is higher than the return you earn on your investment, it is said to be a negative real return rate. For example, suppose the prevailing bank fixed deposit rate is 5.20% p.a., and the inflation rate is 5.50%. It means your wealth is eroding by a 0.30% rate as inflation is higher than the return you earn on an investment. Now, it’s not uncommon for investors to ignore inflation and focus only on the nominal return on investment. But if you want to create wealth in the long-term, you must focus on earning a higher real return on investment.
3. Not having an adequate contingency fund
A contingency fund is a corpus that can be used to meet essential expenses during a financial emergency — the Covid-19 pandemic being the latest example. Countless people lost their jobs or saw a significant fall in business income during the pandemic-necessitated lockdowns last year. However, the going was less difficult for those who had contingency savings in place compared to those who had an inadequate emergency fund.
The point being, building a corpus that could fund your day-to-day expenses and debt obligations for at least six months in the absence of a regular income is something you just cannot ignore. You can do so by allocating required savings at the beginning of the month and cutting down on discretionary expenses if required. Furthermore, if you used your emergency fund last year and now your income is back on track, you must take steps to replenish the fund at the earliest.
4. Not repaying credit card dues on time
Credit cards could be great tools to boost your savings by maximising the value of your card spends – provided you use them smartly and responsibly. However, many still make the mistake of using their credit card recklessly and not repaying their dues on time. Credit card users get an interest-free period of usually up to 55 days beyond which interest charges are imposed. These dues therefore snowball in no time and could soon become unmanageable, also damaging your credit score along the way. As such, you must never breach your budget while using your credit card and ensure you clear the total outstanding within the interest-free period during every billing cycle. You can consider giving your bank a standing instruction to auto-debit your card dues to avoid missing payment deadlines. Also, paying only the minimum amount due would keep your card account active but you’ll still have to bear the avoidable interest charges on the balance dues and you might not be eligible for interest-free periods until you clear the dues in full. On the contrary, timely repaying your credit card dues in full would not just help you save on interest charges and penalties but would also contribute towards improving your credit score.
In other words, these are mistakes that you simply cannot afford to make! Prior knowledge about these mistakes could be a great help in avoiding them. I’ve listed down a few such mistakes in a bid to protect your finances from their adverse impacts.
1. Sharing critical financial details with others
Do you know that according to banking rules, even spouses are not allowed to use each other’s debit or credit cards to withdraw money at ATMs or for shopping? According to media reports, a few years ago, a bank had refused to refund money to a woman customer stating that an ATM card is non-transferrable. The woman’s husband had used her debit card at an ATM but the transaction didn’t go through due to a technical glitch. The point being, you must not share your online banking details, passwords, ATM pin, debit/credit card details, etc., with anyone. You must also keep these instruments and access details in a safe place. Similarly, you should also keep data related to your investments, e-wallet, UPI, etc., safe and secret from everybody. Any laxity in this could lead to misuse and significant losses.
2. Ignoring inflation while investing
Wealth creation is one of the key objectives when you invest in your financial goals. However, when the inflation rate is higher than the return you earn on your investment, it is said to be a negative real return rate. For example, suppose the prevailing bank fixed deposit rate is 5.20% p.a., and the inflation rate is 5.50%. It means your wealth is eroding by a 0.30% rate as inflation is higher than the return you earn on an investment. Now, it’s not uncommon for investors to ignore inflation and focus only on the nominal return on investment. But if you want to create wealth in the long-term, you must focus on earning a higher real return on investment.
3. Not having an adequate contingency fund
A contingency fund is a corpus that can be used to meet essential expenses during a financial emergency — the Covid-19 pandemic being the latest example. Countless people lost their jobs or saw a significant fall in business income during the pandemic-necessitated lockdowns last year. However, the going was less difficult for those who had contingency savings in place compared to those who had an inadequate emergency fund.
The point being, building a corpus that could fund your day-to-day expenses and debt obligations for at least six months in the absence of a regular income is something you just cannot ignore. You can do so by allocating required savings at the beginning of the month and cutting down on discretionary expenses if required. Furthermore, if you used your emergency fund last year and now your income is back on track, you must take steps to replenish the fund at the earliest.
4. Not repaying credit card dues on time
Credit cards could be great tools to boost your savings by maximising the value of your card spends – provided you use them smartly and responsibly. However, many still make the mistake of using their credit card recklessly and not repaying their dues on time. Credit card users get an interest-free period of usually up to 55 days beyond which interest charges are imposed. These dues therefore snowball in no time and could soon become unmanageable, also damaging your credit score along the way. As such, you must never breach your budget while using your credit card and ensure you clear the total outstanding within the interest-free period during every billing cycle. You can consider giving your bank a standing instruction to auto-debit your card dues to avoid missing payment deadlines. Also, paying only the minimum amount due would keep your card account active but you’ll still have to bear the avoidable interest charges on the balance dues and you might not be eligible for interest-free periods until you clear the dues in full. On the contrary, timely repaying your credit card dues in full would not just help you save on interest charges and penalties but would also contribute towards improving your credit score.
The pandemic is a reminder that the need to focus on financial stability is more pressing now than ever before. The challenging year that went by has made people rethink ways to be better prepared for emergencies. Financial stability should be a key milestone for all individuals. It is crucial that one is able to meet all life goals comfortably without any compromises. A financial shield will not only help meet life goals but will also guard individuals and their families against any unforeseen circumstances. Given the ongoing uncertainties, a robust outlook towards financial stability will be instrumental in navigating challenging times.
Balanced financial planning key to financial stability
Over the years, the consciousness towards financial planning has been on the rise as it is a key driver of financial stability. For a long, a majority of Indians usually kept their savings intact in bank accounts or invested in physical assets such as gold and real estate. Lately, the growing awareness about different investment avenues and the smart ways of digital investments has enabled people to invest in stocks, mutual funds, and other market-related avenues for better returns. A balanced portfolio is one that proportionately distributes assets in growth and savings instruments via investments in equities, and fixed income, shares of stocks and risk management products to optimize returns. Such an asset allocation strategy is key to financial stability as it factors in the benefits of each investment instrument.
Financial stability to meet different life stage goals
While growing inflation and rising costs of living are key factors, it’s important to realise that financial commitments evolve as we progress in our lives, and our diverse needs such as higher education, leisure, wedding, child-care, starting one’s own venture or even early retirement require financial stability.
As a first step, it is essential to have clear and defined financial goals for different life stages. Take time out each year to evaluate all your investments and analyse which are the ones bringing in maximum promise for the long term. Your goals will evolve with time and you will need to alter your planning approach for different stages of your life. Depending upon the financial needs such as your child’s education or starting your own venture, these goals will vary from wealth generation to risk mitigation and short term returns to building a retirement corpus.
Simple steps towards strengthening financial stability
Irrespective of where you are in your financial lifecycle, here are some tips that can help you get a better hold of your finances and achieve better stability:
Balanced financial planning key to financial stability
Over the years, the consciousness towards financial planning has been on the rise as it is a key driver of financial stability. For a long, a majority of Indians usually kept their savings intact in bank accounts or invested in physical assets such as gold and real estate. Lately, the growing awareness about different investment avenues and the smart ways of digital investments has enabled people to invest in stocks, mutual funds, and other market-related avenues for better returns. A balanced portfolio is one that proportionately distributes assets in growth and savings instruments via investments in equities, and fixed income, shares of stocks and risk management products to optimize returns. Such an asset allocation strategy is key to financial stability as it factors in the benefits of each investment instrument.
Financial stability to meet different life stage goals
While growing inflation and rising costs of living are key factors, it’s important to realise that financial commitments evolve as we progress in our lives, and our diverse needs such as higher education, leisure, wedding, child-care, starting one’s own venture or even early retirement require financial stability.
As a first step, it is essential to have clear and defined financial goals for different life stages. Take time out each year to evaluate all your investments and analyse which are the ones bringing in maximum promise for the long term. Your goals will evolve with time and you will need to alter your planning approach for different stages of your life. Depending upon the financial needs such as your child’s education or starting your own venture, these goals will vary from wealth generation to risk mitigation and short term returns to building a retirement corpus.
Simple steps towards strengthening financial stability
Irrespective of where you are in your financial lifecycle, here are some tips that can help you get a better hold of your finances and achieve better stability:
- Start early and develop a habit of saving a part of your income consistently every month
- Make a monthly budget by evaluating all your expenses and follow a disciplined approach towards spending. Stick to the budget. It is the best way to ensure bills are paid and savings are on track
- Avail credit solutions keeping in mind your repayment capacity. Regularly monitor your credit reports to be aware of your financial health
- Use your credit cards wisely and ensure payments are done on time
- Buy assets that generate income and focus on investments at attractive prices that are likely to appreciate over time
- Ensure that your portfolio is balanced with the best asset allocation approach that suits your financial objectives
- Prepare a contingency fund outside of your regular savings for unforeseen circumstances, ensuring that savings are never dented
- Maintain a good credit score. It will help avail the best credit options at every life stage
- People often find it tough to take the first step towards managing their finances. As the famous saying goes, ‘The secret to getting ahead is getting started.’ Today, with technology interventions, it is possible to automate regular payments and set notifications to avoid any late charges. These simple steps can go a long way in future-proofing individuals and improving their financing standing. The last year has taught many to be adaptable and forward-looking. It is time to approach money management holistically from a financial stability point of view to get healthy and sustained returns from a short to long term horizon.
Everyone likes money. But not everyone makes it at his/her own will. People make mistakes. Be it making a career choice to making big money decisions like investing, buying a house, planning for retirement or even while making small decisions like buying monthly grocery, there is not an exceptional activity in life where people don’t make mistakes.
Even those considered smart (in their own eyes or by people surrounding them), often make silly mistakes. More so when it comes to money matters. While there is nothing wrong with making mistakes, one does wonder as to why this happens. Why smart people make mistakes, especially when it comes to money? Here are some reasons and how to avoid them.
First, not many people manage their money well. Especially, when it comes to investing in the stock markets, a lot of people focus on what stocks to buy. How are they performing? How are they expected to perform? Instead of focusing on the performance of a stock, the real focus should be on the risks involved and money management. Your smartness may not ensure how good the stock will perform. But you can manage your money smartly.
If you manage your money well, you can come out on top under any circumstances.
Second, many people don’t strategise well. Like in cricket where you can’t hit a six on every ball and you need to keep rotating the strike while being alert for the loose ball to hit it out of the park. In money matters also, having a proper strategy is important. But how to have it? Well, there are two ways – you can either educate yourself or lookout for a good advisor. There is a problem in finding a good advisor too. But the following tips may help you in finding a financial good advisor:
Even those considered smart (in their own eyes or by people surrounding them), often make silly mistakes. More so when it comes to money matters. While there is nothing wrong with making mistakes, one does wonder as to why this happens. Why smart people make mistakes, especially when it comes to money? Here are some reasons and how to avoid them.
First, not many people manage their money well. Especially, when it comes to investing in the stock markets, a lot of people focus on what stocks to buy. How are they performing? How are they expected to perform? Instead of focusing on the performance of a stock, the real focus should be on the risks involved and money management. Your smartness may not ensure how good the stock will perform. But you can manage your money smartly.
If you manage your money well, you can come out on top under any circumstances.
Second, many people don’t strategise well. Like in cricket where you can’t hit a six on every ball and you need to keep rotating the strike while being alert for the loose ball to hit it out of the park. In money matters also, having a proper strategy is important. But how to have it? Well, there are two ways – you can either educate yourself or lookout for a good advisor. There is a problem in finding a good advisor too. But the following tips may help you in finding a financial good advisor:
- Broadly there are two kind advisors. Outside of the banking system, some advisors work on a commission model and others work on a fee-only model. While neither of them can be classified as good or bad, what you should look for is that your advisor must be qualified and licensed by regulatory bodies for offering financial advice. You can skip someone who is working without a license.
- Never let anyone pressurise you into making a decision or purchasing a financial product. If someone is trying to push a product, you should be assured that h/she is a bad advisor for you.
- Once you find a good advisor, do trust him. There is no point in having multiple advisors influencing your money-making decisions, or managing your money. Third, when it comes to money, you should not be guided by your impulses. Only logical, well-thought-out decisions will see you through. You should remember that there is a very thin line between passion and foolishness. The mentality of always running after returns and not taking advice may result in blunders that you may regret for a long time.
Fourth, ask better questions. When you are interacting with a financial expert, it is important to ask better questions that will help you understand how the product in which you are investing works. This will help you decide whether you should stake your money in this product or not. There is no point in asking questions like – Tell me the best mutual fund! Some experts even feel this is the worst question an investor can ask.
Fifth, There is nothing wrong with making mistakes as long as you are learning and making better decisions. Personal finance is heavily personal. What will apply to another person may not apply to you. We are human beings and human beings make mistakes however smart they are. And it is okay to make mistakes. Fear and greed react with different people differently. A lot of people define smart as knowing more, being more educated, reading one book a day etc. But these do not really define you as a smart person. For smart isn’t just knowing more. Being able to control your greed and fear is more important.