FOMO – The Most Dangerous Investing Emotion to Have!
The most difficult challenge that a financial planner faces from a client is handling his fear of missing out (FOMO). When colleagues or friends boast of windfall profits in the stock markets or cryptocurrencies like bitcoin, it can cause one to feel envious, dissatisfied with your returns, and question your investment strategy. It also arouses a fear that, with so much excitement around and money-making opportunities abounding, you could be missing out on making a neat bundle of cash and thus, missing out on having a good life.
Where does FOMO originate from?
People only like to talk about their successes and never about their failures, so as to appear a ‘success’ in gatherings. If one makes good profits in 2 out of 10 stocks, 2 remain mediocre, 3 just survive and balance hugely negative (mind you, this is the way the portfolios of most of the investors work !!), the investor will only talk about the first 2 stocks to his friends and colleagues. Anybody listening to the boast will never know the real thing and get a FOMO.
Why is FOMO dangerous in investing?
There are two strong emotions that drive investing, especially in the stock markets – Greed and Fear. Any decisions taken under the influence of these emotions will almost always be damaging to your financial health. FOMO can affect your rational decision-making and potentially derail your investment planning.
How to avoid FOMO when investing?
- Realise that it exists and will affect you too if you hear an incomplete or one side of the story.
- Avoid the tips given by TV channels, social media and print media. They will only tell you to buy and never about when to sell and take out real profits.
- Realise that ‘time in the market’ is more important than ‘timing the market’. Continuous churning will get you nowhere except pay more and more tax.
- ‘If you are running a marathon, you shouldn’t be worried about the next 100 meters.’ Instead of individual tips and stocks, if you make a portfolio after good research and planning, and then invest, you will automatically shut out the noises that create this FOMO.
(Contributed by Nidhi Dogra, Associate Financial Planner, Team Arjun, Hum Fauji Initiatives)
Direct Equity or Equity Mutual Funds: What is Good for You?
There is no right or wrong answer when it comes to investing in equities; you simply need to choose the correct funds or stocks based on your financial goals, investment horizon, and risk tolerance levels. Equity Mutual funds (MFs) and direct equity both invest in stocks, but in different ways. MFs invest in publicly traded companies’ equity through fund managers with professional experience and knowledge of how the stock market works. Direct equity, on the other hand, is the process of selecting stocks based on one’s own research and analysis.
Before you invest in any of the aforementioned, ask yourself the following questions:
- Do you have a good understanding of equity? Can you read company balance sheets and differentiate a good one from bad even if it is hidden behind layers of mumbo-jumbo?
- Do you know a good time to buy and sell stocks through at least a basic level of technical analysis charts?
- Do you have the time to trade and then patiently monitor companies whose stocks you hold?
- How well can you handle market volatility? How well can you handle your FOMO (refer previous samosa for this)?
If you cannot do ALL OF THE ABOVE FOUR, please stay away from direct stocks – you will only put your hard-earned money to peril. Go for equity MFs where an experienced fund management team will do all this for you for a small fee.
There is a feeling amongst novice investors that direct stocks will give better returns than equity MFs. Please note the following two points:-
- Most direct stock portfolios do not have more than 40% of the stocks giving a reasonable profit. If that be so, those 40% should be able to cover up for the other 60% which are not performing.
- When you buy stocks, you are pitting yourself against other investors who are selling it. Whose judgement is more correct, only time will tell. If you are correct right now, how long will you continue to be correct against all others holding an opposite view, is again a question mark, if you are actually not doing all the four italicized actions brought out earlier.
Also remember that any MF typically has 40-60 stocks giving you huge diversification and a regular monitoring and rebalancing action is being taken by the MF management team.
So what do you think will you go in for now – direct equity or equity MFs?
(Contributed by Priya Goel, Associate Financial Planner, Team Sukhoi, Hum Fauji Initiatives)
Is Your Money Playing Good Cricket?
Mutual fund investments have a lot in common with a cricket test match – both are games of patience, consistency and discipline, all required in good measure.
Just as a good batsman leaves the out-swingers patiently and keeps on taking singles and doubles to keep the scoreboard moving without taking any undue risks, a good long-term investor needs to stay unnerved throughout the market volatilities, and continue with the SIPs and bulk investments made in a consistent and disciplined manner.
Mutual fund investments cannot be compared with a One Day International (ODI) or a T20 game. But of course, if required, market opportunities have to be taken advantage of as a good batsman capitalizes on loose deliveries and goes for boundaries too. These boundaries are not the outcome of any anxiety like in a limited over T20/ODI but a result of taking calculated risks.
The way a good batsman has many shots in his arsenal to get a good score – drives, flicks, cuts, defensive play, sweep, pulls and hooks, Mutual funds too give a lot of tools to reach your financial goals – bulk investments, SIPs, STPs, SWPs, redemptions, switching etc. Using the right technique at the right time separates boys from men in both – cricket and investments…
(Contributed by Jatin Uppal, Deputy Manager, Hum Fauji Initiatives)