How to moderate investment anxiety

The recent fluctuation in the financial markets has made many people anxious. Consider this: The Nifty Index declined by 16 per cent and then increased by 20 per cent during the last two months. During the same period, the rupee depreciated 19 per cent against the dollar and subsequently appreciated by 12 per cent. But if you are investing for the long term, why become anxious because of short-term price fluctuations?

The media continually feeds you with news when markets decline. And you can react in two ways.

Uncertainty prevails

Either you can ignore the news and comfort yourself into thinking that you are a long-term investor; markets typically bounce back after a while. Or you can act on the news and sell your investments, even if you are a long-term investor.

The problem is that you do not know what is better – ignoring the news or acting on it! The uncertain outcome increases motional risk – the risk that your emotions may drive you to act on short-term price movements despite being a long-term investor. And you could end up regretting your decision if you yield to your emotions.

The confusion as to how to react to short-term fluctuations can lead to anxiety. So, what should you do to moderate anxiety? To understand the solution, let us revisit the 2008 sub-prime crisis.

When the financial market crashed during 2008, were you concerned about your real estate investment?

If you are a typical individual, chances are you were less worried (if at all!) about your real estate value compared to your equity investment.

Distance yourself

Why? One reason is that real estate prices are not visible – you do not have real estate prices flashing on your laptop or TV on a real-time basis. And what is not visible typically may not cause anxiety. Price ignorance is, indeed, bliss.

Of course, you cannot invest in equity and pretend that prices are not real-time.

But you can distance yourself from short-term price fluctuations and reduce your anxiety.

How? First, do not call yourself a long-term investor! Rather, have a definite time-period with a financial goal – retiring 20 years hence, for instance.

So, whenever markets decline in the short-term, you know the time-period within which you need to recover your unrealised losses; longer the time-period, lesser your anxiety. And second, set up automatic debits from your bank account to buy investment products.

After, say three months, the process becomes mechanical and helps you distance yourself from your investment. And that can reduce anxiety.

But remember: you should not read your investment statement frequently. For, that could defeat the purpose, cause anxiety and hurt your physical and financial health!

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