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7 deadly sins that can ruin your investment gains

Last updated on: March 24, 2010 10:05 IST

7 deadly sins that can ruin your investment gains

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Sheetal Jhaveri

'Individuals who cannot master their emotions are ill-suited to profit from investment process': Benjamin Grahram, financial analyst and father of value investing.

Here is one person whose example I am sure most of you will be able to relate to. Meet Ajay Sinha, 34, professional who started to dabble into stocks when the market was having its best time. Yes many an investor has turned to stock market during that time. When the market touched 21,000 he had stars in his eyes when he calculated his profits.

But greed overtook his rational thinking and he held on to his shares when the stock market reversed (does it ring a bell? I am sure 90 per cent of investors will be able to relate to him).

Then came the big crash; stars were replaced with fear and anxiety. Just as markets started its fast journey downhill Ajay, a novice investor, went into panic mode and started booking profits to get out of the ill fated market. Well, started booking losses, actually.

Well, fear is the key! When it comes to investments, especially in the stock markets, rationality goes out for a toss. Emotions take over and all the investments are guided by emotions, two of the worst being fear and greed.

Emotions and investments should never be mixed together. Sounds good but generally this is not the case.

In fact, for most of the investors they go hand in hand. It is not totally possible to detach emotions from your investments but there is no harm in trying. In fact, it is a must.

Emotions can make you take investments decisions which are definitely not right. Take a look at the perils of mixing emotions with investments and I am sure everyone will start trying.

Feeling left out

How many of you have bought a particular stock or investment just because everyone was investing in it and you felt left out?

The fear of being left out from making profits, when the whole world is making hay, generally makes you buy when the prices are too high.

Click NEXT to read how panic and greed can ruin your investments.

Follow Sheetal Jhaveri here

The author is a certified financial planner and can be reached at dhanplanner@rediffmail.com



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Greed is good? Well, not always!

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Panic

This happens when you have not done your research properly and have invested as everyone else is investing. Something that goes by the name of 'herd mentality'.

Hence when the market is falling or your investments are not performing the panic mode automatically kicks in and you either sell with marginal profit or, invariably, at a big loss. In other words panic selling.

Greed

Remember Gordon Gekko (portrayed superbly by Michael Douglas) and his infamous creed: Greed is good. Remember his fate? Well, if you have seen Hollywood movie Wall Street you will know.

How many of you have not sold that share despite getting a neat profit of more than 50 per cent and then regretted when prices started falling faster than you would write profit on your book?

Well my guess is most of the investors. No one is an exception to this emotion. Even the most solid of investors amongst us fall prey to this emotion. Greed overrides all your mental faculties. The greed to make that extra cent.

Most gamblers lose everything as they allow this emotion to overrule their rational thinking. A very dangerous emotion, one which is widely observed amongst stock market investors and traders.

Click NEXT to read how pain and hope can ruin your investments.



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Hope can lead to more risks

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Pain

It is said that the pain of losing money is two and half times the joy of gain. Just so to convert their losing positions into winning strategies investors often try to average her/his cost and recover losses. But doing this s/he does not realise that her/his risk capital and exposure to markets have increased. This may also lead to not recognising other opportunities which maybe present to neutralise the loss.

Hope

Doesn't hope spring eternal in human heart? An emotion that everyone holds on to, especially in desperate times.

Many investors hold on their losing positions or dead investments with a hope that it will revive one day. Although this may happen in a few cases in most of the scenario it does not. This hope also makes an investor invest more money in a losing gamble which again leads her/him to more risks.

Click NEXT to read how impulse and anger can ruin your investments.



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Anger doesn't solve anything

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Impulse

Although it may lead to a good decision once in a while in most scenarios it ends in a disaster. Especially when it comes to investments it is best suggested to stay away from this emotion as investments should never be made on impulse hunch or intuition.

Your investment decisions must be made in a calculated and informed manner.

Anger

A very dangerous emotion. Anger has never solved anything (has it?). The same goes for investments.

Many a times this emotion takes over especially when you go wrong in your decisions. This can then lead an investor to totally ignore that particular form of investment which invariably leads to wrong asset allocation and fails to meet her/his objectives.

An investors worst enemy is his emotions. But controlling your emotions while entering the investing arena is easier said than done. Emotions can never be kept away from investments.

But well-planned and informed investment decisions based on the goals you want to achieve in life and the time frame in which you want to achieve it are the best guides to intelligent investing.



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