Your investments are a function of two primary emotions: greed and fear. The two paramount emotions drive asset prices. In the stock market, the fear of loss keeps 98% of Indians away. At the same time, greed gets more people into the market. Less than 1% of traders make money, as we know now.
The fear of losing money is expected. If you search online, you will find that mental conditions push people to avoid spending money due to such fears.
You may be risk averse, but at some stage, you must learn to convert that fear into an opportunity.
Money is made or lost when markets are greedy or fearful. You must learn about preparing yourself to deal with the situation.
There are several ways you can avoid losses while investing. While it is not possible to eliminate losses in investing, you can certainly minimise them.
Cut your losses
If you lose money on any asset, you must get rid of it quickly. Sometimes, you may not be aware of the market value of your investments. In that situation, you need to list your assets and create an estimate of the value. Compare it to your cost of acquisition and review. There are several questions you need to ask yourself.
For most people, a fundamental reason to own a loss-making asset is more emotional than rational. If you can put mind over matter, you can cut those losses. If you own more than two houses and are struggling to manage the upkeep, that is a signal to rationalise your ownership of homes. Similarly, if you own a disproportionate amount of gold, you must convert some of that into financial assets. You can also sell excess physical gold and buy sovereign gold bonds or exchange-traded funds.
A similar rule should apply to your financial assets. You must work with a professional advisor to organise your investments. Shares of companies that have been underperforming for far too long should be done away with. Sometimes you indulge in ‘over-diversification’ and buy too many mutual fund schemes.
Try to own less than 10 MFschemes across multiple asset classes. Identify suitable instruments based on your financial goals and invest. There is a school of thought that you should double your bet if prices fall. However, you need adequate knowledge and confidence to execute such a strategy. It is better to avoid taking action based on hearsay.
Learn from your mistakes
Losing money at a young age is not such a bad thing. You have an opportunity to rebuild your savings and investments. Even if you lose some money later, there are lessons you can learn. Keep a close watch on your assets and review them regularly with the help of a professional advisor. Money spent on quality advice is like prevention in healthcare. You do not want to spend money on fixing things later.
Investing is all about knowledge. You cannot say you are unaware when your money is at stake. It is your hard-earned money, and it deserves your attention. While it is not necessary to be an expert, you can learn to connect the dots by reading more about the market and economic trends. It is better to take charge of your money affairs than rely on the advice of neighbours or friends.
What you can do
Financial planning helps you take control of the situation if you think your money is not working enough for you.
While a professional can help you structure it, you must follow your plan. You cannot stop your systematic investments or sell something in a panic situation. You must not let emotions get on top of you.
While we can talk of ways you can take the proper steps or investment decisions to avoid losses, patience is a virtue that can go a long way. ‘Getting rich slow’ is a proven mantra of Warren Buffett, the legendary American investor. You can cut your losses by reading about him and his communication with his shareholders.
Knowledge is a potent tool for managing money.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)