How financial advisors can help you make informed investment decision

Each bull market adds huge number of investors to the equity markets. As per the reports, there were about one crore demat accounts opened just in the last one-year period and that has been a record ever in the Indian stock markets. While the markets continue to behave in their own ways, the journey of the participants is not always aligned to the market conditions. It could be because the investors exposure to the market might be different from that of the growth areas of the market and the timeline considered for the comparison might not be appropriate.

Overall, each investor has and will have a journey most unique to them in the ways they approach the risk, expose the risk and tolerate the risk. It's thus imperative to conclude that the investment returns depend upon the investor and just the markets as such. So, the biggest contributor of returns on the investment is not how the markets behaved, but how the investors responded to the market's behaviour. One has to look at two simple questions: Can one control what is happening in the market and can one control how to react to what is happening in the market. The answer to the first question is a no and for the latter is a yes.

The gyration in the market is nothing but the collective psyche of the investors experience of fear, greed or in between. Each of these stages is associated with the investors sell, buy and hold decisions respectively. In general, most humans are optimistic, we plan and think about tomorrow and a fair bit of optimism is ideal for equity investing as the valuation metrics depend upon the future cash flows of a company. However, over-optimism is a bane for investors and being skeptic while questioning the optimistic scenario is possibly better investment strategy.

Another peril is the itch to act or be active in the markets. Many investors believe that investing requires so much of analysis, tracking and movement at most of the times but in fact, it's good to remain inactive to make better returns. At times best action to make in the market is to not act at all, that would help the investor to give sufficient time to the security which they're exposed to. For investors looking for excitement and adrenalin rush could explore gambling or poker.

Of course, this could be done only when one is clear about their objectives of investing in equities, at the first place. It helps to define the goals and have an action plan based on this objective keeping in mind the risk profile and timelines. This allows the investor to focus on the process and not worry about the result. One has to understand that chasing returns or having a pre-define returns is a good idea but it's better achieved by the risk management than return targeting.

While we could do enough analysis about a particular stock and even gain conviction for it hold but the returns on that investment depend only when the market also believes or sides with our rationale. As Jim Grant put it, 'successful investing is having everyone agree with….. later'. So, for an investor to succeed, one has to be aware of the various biases they hold and the how one addresses these biases.

The better way to approach or mitigate the impact of these biases is by ensuring consistency in the decision making. If an investor has set out a methodology to approach the markets, it's better for them to stick to that unless there's a huge fundamental change that destabilizes the overall markets. For instance, if a particular stock has suddenly run up quick giving enormous returns, the investor should check for rebalancing the portfolio is necessary as the excess growth could increase its proportion in the portfolio. An undesired exposure would be out of sync with the risk profile and thus could escalate for a drawdown risk.

Another critical factor is to avoid loss aversion bias, where the losses are felt more than the gains of similar proportion. We prefer pain to be short while job lasting forever. So, in investments time correction doesn't affect the emotions as much as price correction. People mostly remember days in which the markets experienced sharp correction or fall but often ignore the fact that a fall in markets on a single day followed by a slow recovery is like markets staying flat/remaining range bound over a period. As Jason Zweig said, 'investing isn't about beating others at their game, it's about controlling yourself at your own game'.

It's, hence, ideal to have an advisor or mentor to guide you in investing as a qualified person could evaluate the decisions at these time from a rational view than an emotional perspective. Also, he/she could form a speed bump in your train of thoughts at these volatile times to make more judicious decisions.

(The author is a co-founder of 'Wealocity', a wealth management firm and can be reached at knk@wealocity.com)