Don’t let Recency Bias distract you
Last year in April 2020, when the markets had gone down, some people were almost ready to sell off all their equity holdings due to the market downturn. Our conversations with some of them revealed that many in their friends and family circles actually went ahead and sold-off their stocks and equity mutual funds in panic.
From November 2020 onwards, when the Indian equity markets reached all-time highs and were still rising, many of our investors wanted an immediate review of their portfolios with the aim of increasing their equity exposure.
This is called Recency Bias in behavioural science. Those who were afraid that the equity market will continue to fall or may not recover ever again have been proved wrong. Similarly, the recent rally might also not be permanent. Who knows!
As an investor, don’t let Recency Bias distract you. The only thing it can do is to distract you from your financial goals and get you into deep troubles. Maintain focus on your goals and asset allocation. Of course, it goes without saying, that if situation drastically changes, we can always review your portfolios and discuss if it needs any changes.
Top-up your SIPs to keep pace with your increasing income
Often it has been observed that many people, in order to time the market or because of their ignorance, keep sitting on a large amount in their savings bank account for a long time, literally earning nothing after tax. Such an attitude can prove costly in the long run to an investor. Ideally you should keep increasing your investments as and when you get an increment to your earnings.
One of the best ways of doing so is opting for a Systematic Investment Plan (SIP) along with a top-up facility. The SIP top-up option allows you to enhance the SIP instalment by a fixed amount after laid-down intervals on a regular basis. For instance, you can choose to enhance the SIP instalment amount half-yearly or yearly by some percentage of basic amount, say 10% or 20% or you can choose to increase it by specified amount, say Rs 500 and then in multiples of Rs 100 or Rs 500 depending on the mutual fund company’s policy. Use this facility to keep pace of your saving in line with your income.
Invest in Gold at this stage only if your asset allocation says so
Gold prices have fallen in the past two months. It is possible that someone tries to hard-sell you the traditional wisdom of buying at a discount when prices fall. But every situation has its own merits and demerits. For now, it is important to not get carried away by the price drop. On the other hand, that doesn’t mean gold is not to be bought at all.
It is important to make your investment decisions based on your own unique situation and requirements. If your asset allocation demands that you buy gold, this (like any other time) can be a good time for you.
An allocation of 5-10% of your investments in Gold is good. Even there, be sure you use the right instrument to buy that gold. Buying jewellery with high making charges might be a waste of your money. Digital forms like Sovereign Gold Bonds (SGB) or Gold ETFs are better options if you’re putting in bulk money and Gold Mutual Funds if you want to invest small amount regularly. Even here, beware of the peculiarities of each, eg, SGBs have a long lock-in period.