This is one of the emotional bias we all face with our investments. It is important to note no one ever reacts rationally to investments. In fact, none of us ever permanently react rationally to most of the situations. We all react emotionally. This is because we all are human beings. We have emotions and these emotions keep changing from time to time.

The important thing to note is we all react irrationally. Opposite of rational, when it comes to human emotions, it is not irrational, it is emotional.

Let us try to understand the emotion of loss aversion with an example. Rajeev Iyer invested ₹50,000 in stock A at ₹50 per share.

Next day, when he checked, the price had risen to ₹55. He felt good. Mind you, this was only a notional gain. Mr. Iyer had not sold the stock to convert into a real gain.

Now, assume, instead of ₹5 gain, if the price had dropped by ₹5 to ₹45 per share. In all probability, the pain of notional loss would have been more. As a practicing financial planner, I have heard so many times a statement from investors that “prices of stock that I invest always fall after I purchase them”

Sometimes, I jokingly tell them, “your mind is so powerful that it can move the price of a stock.” Continuing the joke, I further tell them, “please keep me informed of your purchases in future. I will make it a point to purchase the same stock few days after your purchase, so that I get the stock at a lower price.”

My elderly uncle and aunt at my home town of Ahmedabad always tell me, “we don’t have luck when it comes to investing in stock market and hence, now we always invest for short term.” Initially, I use to tell them, “stock market investing is not for short term, it is for long term, but now I have stopped telling them.”

Pain of loss

Why is it that pain is more at loss and happiness less at gain, even though both are notional? The fact is we all have expectations from investments. Expectations of gain. This is logical. We all invest to make money grow. In a scenario, where there is loss in our investment, the situation is opposite of expectations and hence, there is pain. This is true in all walks of life.

Anything that happens against expectations causes pain. Therefore, notional gain, which is as per our expectations, gives less happiness than notional loss which is against expectations.

The easier way to deal with this emotion is to link investments to financial goals. For example, if we are investing for a financial goal, say higher education of daughter or son, which, as per our thought process, will come up after 7/8 years, then prudent investment should be in equity as an asset class.

Equity MFs

It is not necessary to invest in stock market directly. An investor can also invest in equity as an asset class through equity-based mutual fund (MF) as well.

Investing based on financial goal will relieve us of temporary pain or gain and the roller coaster ride of mind attached to it. If we have invested for a financial goal which is likely to occur after 7/8 years then any notional fall immediately after investment will not impact us.

It is like boarding a train from Mumbai to go to Indore. Once we have boarded the train, we do not keep checking the speed and other parameters of train movement at an immediate frequency. At the most, we just keep checking whether the train is running on time or not and even if it is a little delayed, we do not get disturbed overwhelmingly. We also do not get impacted by passengers boarding or getting down in between.

Another very important thing to be kept in mind is, do not keep checking the prices on daily, weekly or even monthly basis.

Most investors check price movement of the latest investment at a very high frequency. Over a period of time, the euphoria settles down. In the next phase, they do not even check the details of performance for months and sometimes for years. This is very detrimental to our investment, which has been made with our hard-earned money.

As a financial planner, I have always recommended that a couple spends about 2/3 hours every quarter, that is about 8/10 hours a year on the status of investments. Mind you, every time a review is undertaken though not necessary

To modify our overall financial health, I have coined a term, which I use very frequently. A couple must go on ‘financial date.’ This will keep love and wealth in good shape.

Try it out and write to me about how the experience was. We all can avert the emotion of loss aversion by linking our investments with our financial goals and going on ‘financial date.’

(The writer is a financial planner and the author of Yogic Wealth)

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