Investing is all about routing your savings into various return-generating products to achieve goals such as buying a house and educating your children.

There are several reasons why you could fail to achieve your goals.

Here we discuss some common behavioural risks you are exposed to because of which your investments may not be aligned to your goals.

Behavioural risks Behavioural risk is the risk that your portfolio will accumulate lower-than-required wealth because of your investment behaviour. Here are the types of behavioural risks you need to be aware of.

You may intend to save regularly. Yet, this may not consistently translate into actual savings. After all, it takes effort to control spending and save and then route the savings into appropriate investments on a continual basis. You have little chance of achieving your goals if you do not save consistently. And your chances are further reduced if you do not increase your savings every year to keep pace with inflation. The first behavioural risk you have to manage is inertia and procrastination.

Next, you may often turn your attention to earning high returns. The problem is that you are likely to make risky investments to achieve those high returns.

The upshot? You may fail to achieve your goals because risky investments also have high downside risk. Thus, the second behavioural risk you have to manage is impulse and greed.

Your investment choices are primarily driven by your risk perception. You are more likely to buy investment products that you are familiar with because you perceive them to be less risky. Likewise, you are likely to underplay the risk associated with equity investments when the markets are up than when they are down.

This is because you project the immediate past trend into the near future. Your perception of risk could affect your allocation to equity and, hence, your chances of achieving your goals. Hence, the third behavioural risk you have to manage is familiarity bias and projection bias.

The question is: How should you manage these risks?

Managing risks Behavioural risk may appear easy to manage when you are in a cold state — when you do not have craving for higher returns or for spending more.

But you are likely to swing into a hot state when offered high-return generating products or when you are faced with opportunity to spend more. An effective way to manage behavioural risks is to emotionally distance yourself from your investment decisions. How?

Every month, you should automatically transfer money from your savings account into appropriate investment products. This way, you can overcome inertia and procrastination.

You should also increase your savings every year through forward systematic investment plan (SIP) that will start at a pre-determined future date. This date should coincide with your annual salary raise.

Your primary focus should be on achieving your goals, even if it means avoiding high-return investments.

Of course, that is easier said than done. After all, you will derive high emotional satisfaction when your high-return investment pays off.

So, set aside about 10-15 per cent of your total investment capital to buy high-risk, high-return products.

House these investments in your satellite portfolio. So, any loss in this portfolio will not affect your core portfolio. Importantly, your core portfolio will contain goal-based investments.

Distancing your emotions will eventually become mechanical. This way, you do not have to moderate your risk perception. You simply ignore it!

The writer is the founder of Navera Consulting. Send your queries to >portfolioideas@thehindu.co.in

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