Financial competence is important to manage your investments on your own. But equally important is your emotional intelligence — the ability to identify and manage your own emotions.

In this article, we discuss why emotional intelligence is important to self-manage investments and how you can moderate the adverse impact of emotions on your investment performance.

Instant gratification Your mind typically battles between instant gratification and delayed feedback. Optimal investment decisions are possible if your mind favours delayed feedback. But your emotions could prompt you to tilt towards instant gratification.

You have to set aside money from your current income to accumulate wealth for future consumption. And yet, you cannot be sure as to whether your sacrifice will bear fruits, because the outcome will be known only at the end of an investment horizon.

Your emotional mind, unable to measure the benefit that you are likely to receive in the distant future, prefers instant gratification — consuming more today.

Delayed feedback can also lead to anxiety. This is an emotion that you will display when the perceived outcome is uncertain, as in the case of equity investments.

The point is anxiety can lead to inertia or procrastination. It can delay your taking an investment decision.

Such delays can cause harm, especially in the case of long-horizon investments such as retirement savings or top-priority investments such as your child’s education fund.

Take retirement savings. Each year of delay would mean that you have to save more from your current income to achieve your retirement goals.

Too many choices Call it the paradox of choice if you will, but the fact is that the abundance of choice among investment products can lead to emotional pain.

You have to take a decision to select some investment products when faced with many choices. The responsibility of a bad decision, hence, rests with you!

That is not the case when you are offered only two-three investment products — you can invest equally across the products to overcome bad choices.

Yet, choosing among multiple products or investing equally among two-three products is injurious to financial health.

For one, the emotional pain from bad choices can lead to fear while taking subsequent decisions. This could hinder your judgment.

For another, investing equally across products could leave a pile of investments in your portfolio over a period of time. And that could be bothersome in effectively monitoring and rebalancing the portfolio.

Controlling the effect As you mature and improve your emotional intelligence, you will realise that certain emotions are difficult to continually control.

You could, however, identify the emotions affecting your investment decisions and distance yourself from those decisions. How? You can set up systematic plans on equity and fixed deposits. This way, you do not have to battle between instant gratification and delayed feedback each time you take an investment decision.

Of course, you do need to overcome the urge for instant gratification when you initially set up the systematic plans! It would be easy for you to set up these plans when you are in a cold state — when you do not feel the urge for instant gratification.

Systematic plans also moderate your anxiety levels, which are directly related to your active decisions.

You can moderate your anxiety levels by setting up automatic debits from your bank account to your chosen investments.

You can, in this way, avoid taking periodic decisions. This will help you distance yourself from your emotions.

Finally, using passive investments as default choices can help you moderate the emotional pain caused from taking active choices.

Such investments include equity index funds, recurring bank deposits and provident fund.

The writer is the founder of Navera Consulting. Feedback may be sent to >portfolioideas@thehindu.co.in

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