Financial Cocktail Samosas: Bitesized Money Morsels For You, 16/08/2023

Mind Over Money: How Your Brain Influences Investment Decisions

As your trusted financial advisor, we understand that investing can sometimes feel overwhelming, particularly if you have no prior financial experience. Today, we’d like to throw some light on a crucial investing topic that frequently goes unnoticed: the influence of your brain on your investment decisions.

Why this topic?
Your brain is a powerful tool that can affect how you see and manage investments. Understanding these influences can help you make smarter financial decisions. Each and every successful investor in the world has repeatedly called investing essentially a brain game – the tricks that one’s brain plays with own psyche and how we ourselves play them – rather than how correctly you choose investing avenues and time them.

So, let’s start with a simple example.
1. Emotions vs. Logic: When you’re on a rollercoaster, you can’t deny the thrill and excitement. Similarly, when the stock market rises, you feel thrilled, leading to an emotional attachment to your investments. However, when the market goes down, fear and panic might take over, leading you to make hasty decisions.

2. Overconfidence Bias: Consider yourself playing a video game that you are convinced you will win. In the world of investments too, one or some previous ‘wins’ give you the overconfidence that your predictions are always accurate, leading to riskier choices without thorough research.

3. Herd Mentality: Think of a school of fish swimming together. As investors, you too might feel safer following the crowd and making decisions based on what everyone else is doing, rather than considering your own financial goals.

4. Confirmation Bias: Consider yourself looking up reviews before making a purchase. If you find positive reviews first, you might ignore the negative ones. Similarly, investors may focus only on information that supports their existing beliefs about a particular investment.

So, how can you overcome these biases?

Educate yourself about investing and financial instruments.
Set clear goals and define your risk tolerance.
Diversify your portfolio to reduce risk.
Stay disciplined and stick to your investment plan.
Seek professional guidance from a financial advisor.

Remember, understanding your brain’s biases will always lead to better investment decisions.

(Contributed by MF Alam, Senior Financial Research Analyst, Hum Fauji Initiatives)

Emotional Aspects of Real Estate Investment: Balancing Sentiments with Financial Prudence.

We understand that real estate investment can be an emotional journey. For some, it’s a dream realized; for others, a path to financial improvement and status elevation. However, it’s vital to recognize that real estate investing is finally just a financial endeavor.

Let’s explore this further with a mindful approach.

Emotional factors that can influence real estate investments include:

The desire for a sense of security and stability.
The hope of improved finances or a better economic situation.
The desire to own a home as a status symbol.
Family support and expectations.

But Challenges of real estate investment include:

Opportunity cost: Long-term savings for a property can limit potential higher returns from other investment avenues.
Liquidity issues: Real estate can be difficult to sell quickly, leading to potential discounts.
High transaction costs: The high transaction costs associated with buying and selling a property can further impact overall returns.

Can emotional attachment result in a lower return?
Rakesh Jhunjhunwala impulsively sold his Crisil shares worth Rs. 27 crores in 2004 to buy a flat. If he had not sold it, they would have been worth Rs 700 crores in 2015. This highlights the potential rewards of investing in equity, but also the risk of selling too early.

Emotions play a role in real estate decisions. Acknowledge them thoughtfully to make astute financial choices that align with your aspirations.

It is important to be aware of the emotional factors that can influence real estate investment decisions. By carefully considering these factors, you can increase your chances of making a wise financial decision that meets your needs and goals. However, it is also important to remember that real estate investment is finally a financial investment, and you should carefully consider the risks and challenges before making a decision.

(Contributed by Avinash Kumar, Financial Research Executive, Hum Fauji Initiatives)

Would you like to know more about your investment in real estate? Connect with us now!

Can an Artificial Intelligence (AI) Tool be your Financial Advisor?

In today’s fast-paced digital world, artificial intelligence has disrupted traditional industries, and finance is no exception. The rise of AI-driven advisors has opened up new opportunities for investors of all hues.

These AI-powered platforms have gained popularity for their cost-effectiveness, convenience, and data-driven investment strategies. However, while ‘Robo-advisors’ offer significant advantages, they also come with certain limitations, which include:

No personalisation – If you want to buy individual stocks, most roboadvisors won’t be able to help you. There are sound investment strategies that go beyond an investing algorithm. Investment should be done keeping a holistic view in mind rather than following a set of rules.

Overreliance on past performance by roboadvisors is another problem, as the financial markets keep changing every day and past performance never guarantees future results.

Establishing trust is crucial in any financial advisory relationship. The face-to-face interaction deepens the connection between a financial advisor and the client.

Change in Regulations – Rules are changing every day, and it is difficult for robots to adapt to these changes on a real-time basis.

One of the most important parts is handling emotional reactions during market turbulence. Investors may be tempted to react impulsively during periods of market instability, which could harm their long-term financial goals. A human advisor can act as a calming force and help clients make rational decisions.

Finding the right balance
The future of finance lies in embracing both AI and human advisors. Investors can harness the efficiency of roboadvisors for day-to-day management and data analysis while benefiting from the invaluable human touch of experienced advisors during times of uncertainty, emotional support, and personalized financial planning.

The human touch plus technology and AI is quite an unbeatable combination!

(Contributed by Vishakha, Relationship Manager, Team Arjun, Hum Fauji Initiatives)

Looking for more information about the use of technology in finance? Contact us

What did our clients ask us in the last 7 days?

I have a bulk amount to invest. How should I go about it – invest in One Shot in Equity Mutual Funds or go through a slower Systematic Transfer Plan (STP) Mode in the current volatile markets?

The equity market has been volatile in recent months, and this has led some investors to wonder whether they should invest in one shot or through STP mode since the markets are ‘continuously’ rising.

There are pros and cons to both approaches. Investing in one shot means that you are buying units of the mutual fund at the current market price. This could be financially unremunerative if the market goes down, but it can also be rewarding if the market continuously goes up.

STP mode, on the other hand, means that you are investing a fixed amount of money on a regular basis for the long term by effectively making a SIP out of your bulk amount while the amount yet to be invested earns debt fund returns which would be close to a bank FD return. This can help to reduce your risk, as you are buying units of the mutual fund at different prices. However, it can also mean that you miss out on some of the potential gains if the market goes up quickly.

In a volatile market, there is no clear-cut answer as to which approach is better. However, there are a few factors that you may want to consider:

🟢 Your investment horizon: If you are investing for the long term, then you may be more comfortable investing in one shot. This is because you are more likely to see the benefits of the market’s upward volatility over time. However, do remember that markets never go up one way – there are continuous ups and downs where your STP would be able to smoothen out the average purchase price, the way a flywheel smoothen the jerky outputs of the engine in a vehicle.

🟢 Your risk tolerance: If you are not comfortable with risk, then you may want to consider investing through STP mode. This will help to reduce your risk, but it will also mean that you may not see as much potential upside if markets go up substantially during your STP period.

We at Hum Fauji prefer to use the STP mode for bulk investing due to:

🟢 Equity markets never go straight up ever. The downturns in the curve always give opportunities for doing small ‘bullet transfers’ from the debt fund to the target equity fund to take advantage of market opportunities.

🟢 Our data analysis shows that STP almost always does better cost-averaging than timing the markets.

🟢 One can always do a complete transfer by completely shifting the funds if markets seem to be rising up fast.

🟢 Thus, STP gives far better flexibility in investments than committing the complete money at one go.

Ultimately, the best way to invest depends on your individual circumstances and risk tolerance. It could be good to speak to a financial advisor before making any investment decisions.

(Contributed by Team Prithvi, Hum Fauji Initiatives)