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  • Writer's pictureSahastha

How do Emotions effect investment decisions?

Updated: Oct 4, 2023

We are often ruled by our emotions and do the most inevitable in terms of investments. Emotions getting involved in investment decisions leads to poor results. We won’t be able to make good decisions if emotions are controlling our decision. However, it is easy to say ‘stay unemotional towards your investments’, it is equally tough to follow.

People get influenced by someone, our investment decision can be affected by numerous behavioral biases that will impact the quality of decisions. In addition to being aware of our emotions and correcting their impact on our decisions, we should also keep an eye out for others trying to influence us in making investment decisions that might not be in our best interest.

I want to share some common examples of how they might impact our investment decisions.

As soon as you start earning and have sufficient saving, your friends, family and colleagues gives you a very unique advice, which will be pushed numerous times at regular intervals until you act on it. Unable to cope with the tremendous pressure, you finally make an emotional decision of buying a house or we should say buying a liability for next 20 – 25 years. Instead of thinking about a job change, change of location, migration to foreign country, you just put your largest bet yet in an immovable/illiquid asset. This is how emotions overruled practical sense of judgment.

Our families have huge attachment with ornaments because gold brings sense of security, also we feel respected and valued in society if we wear gold. We do not think about the price, we are just buying the gold and keeping it in lockers, for the sake of buying it. We need to analyze the prices while buying gold, also the making charges play an important role in physical assets. Rather than accumulating a lot of physical assets, we can buy it in electronic mode like SGB bonds. It will have the same value as physical gold.

As we know most of the Indian families invest their savings in chit funds. Due to lack of awareness/knowledge about investments, People who are from villages and small income group have requirement of money/little bit of savings choose chit funds. It’s very easy to start a chit with minimum 10 people with very less amount. What if tomorrow a few people refuse to continue? Today, most of the chit funds are scams! This is the instrument without proper regulations. Rather than this chit funds, you can start investments with post office RD’s, PPF’s etc.

Till few years ago, traditional plans like endowment policies, money back policies, pension plans, etc. were pushed in a big way. People get influenced by their relatives, friends or neighbors. They compelling to take a policy without reading it properly. I will give you a practical example that an insurance agent who is my relative pushed me to take the policy. If I don’t take the policy, my relation come in danger. Somehow, It’s an obligation to help him, I took the policy emotionally without knowing proper policy details. It has locked my investments in long-term with poor returns. Don’t make investments complicated. It will be easier when you keep your emotions out of your investments.

Every person should make proper investment plan to achieve their financial goals. Seek financial advice time to time from a legit financial advisor.

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