Behavioural science can tell you the future of your wealth. As you welcome the New Year, you must focus on your investment beliefs, preferences and social interaction tendencies. They affect your decision-making ability. For example, a study of investors in the United States cited in the latest National Stock Exchange bulletin highlights neuroticism as a trait affecting investment decisions.
Your emotions determine the course of your actions. Negative emotions can gather pace almost immediately after you suffer losses. That could be a factor in the bad timing of entering the market. However, you may keep hanging on to those negative emotions longer than required.
Stockbrokers often mention a dark space which most investors dive into if they suffer losses more than twice. There are more than 10 crore investor accounts in India. However, most actively traded are a fraction (close to 15% or 1.5 crore).
The concentration of traders is mainly in the Western parts of India if you regularly follow the data published on investor trends. Mutual Fund investors are primarily in large cities like Mumbai and Delhi more than in the hinterland. The fear of loss keeps most people from being active in the stock market.
Investment beliefs
It is possible to form investment beliefs based on data. For that, you need to take an interest and read about factors that affect interest rates and share prices. Even if you are not from a financial background, engaging with an independent financial advisor is a good idea.
You can discuss your thoughts about risk in the market and assess your ability to take it. The way you invest is a function of your ability to take risks. If you speak to those who have spent years watching the stock market trends and investments, they will tell you that your confidence in your future income will determine the risk you can take. It has nothing to do with age. There is a common perception that you must minimise risk as you age.
However, you can still invest in equity markets if you are confident about your income. Retirement years are stretching further with better life expectancy. There is a good chance that you could live for more than the previous generation. You need to ensure that you can generate adequate inflation-beating returns. Your data must be about consolidating your investment beliefs around your life and financial goals.
Investment preferences
Your choices will be based on your beliefs. If you use data to structure your beliefs without allowing emotions to overpower your decision-making, you may be able to arrive at your investment preferences.
In the world of investing, that is called asset allocation. You can align your investments to your financial goals. Your long-term goals can have a higher portion of the equity allocation, while short-term goals can have a combination of equity debt or fixed deposits.
If you let your fears overpower your decision-making, you will end up with all your money in the bank or in investments that barely help you cover inflation. For long-term financial goals, you must beat inflation successfully as the costs of everyday things spiral.
Social interaction
Your social interaction should be with informed people. Discuss investments with those who know a lot more than you. There is no need to act on every advice that people give you. These days, social media groups circulate a plethora of information. You can read and absorb as much as you can. However, acting on
that information is a bit dangerous. You should not put your money behind something because of some random tip. Ensure that your money gets directed towards a financial goal.