Personal Finance

Moderate your comfort investments

B Venkatesh | Updated on September 01, 2019 Published on September 01, 2019

Wealth-related emotional responses can drive you to choose sentimental investments

There are comfort investments just as there are comfort foods. In this article, we define comfort investments and explain why you should moderate your exposure to such investments for your goal-based portfolios.

Comfort factors

You typically eat comfort food when you have negative emotions because such food makes you feel good for a while. High-sugar and high-carb food can, however, affect your health over the long term. Comfort investments may be no different.

We define comfort investments as those that make you feel good about your personal finances. Often, your wealth-related emotional response to family or peer pressure drives you to choose sentimental investments. Two such investments are physical gold and real estate.

Do not get us wrong — gold and real estate are not always bad investments in the long term. We want to show that these investments are more like comfort food. They make you feel good about your investments in the short term, but may not necessarily be good to achieve your life goals. Why?

Unlike previous generations, you may prefer to move across cities or even countries to further your career. So, real estate could then be a cause for concern. For one, it is an immovable asset that is not aligned with your portable employment opportunities. For another, it is a lumpy asset. Given modern-day asset volatility, why have a significant part of your investments in a single property?

As for physical gold, it cannot be easily converted into cash. True, gold can be used as collateral to raise money in quick time. But your objective is not to invest in an asset that can be offered as collateral. You want to invest in an asset that is portable, liquid and importantly, has the potential to give high returns to achieve your life goals.

While overcoming the craving for comfort food is not easy, you can take actions when it comes to comfort investments. How?

Investment decisions are often driven by emotions. If you choose an active equity fund, your adrenalin may be pumping each time the market dramatically moves up or down.

Moderating emotions

The same is true if you make direct investments in equity. Such adrenalin rush could pose problems. What if the market tanks? You may be tempted to sell your equity investments and invest in bank deposits. But imagine the regret if the market bounces back after your sell your investments?

So, one way to moderate your emotions and your exposure to comfort investments is to have boring investments — those which will not cause your heart to flutter as much when the market jumps wildly. One such boring investment is equity index funds. Why?

An index fund has only market risk. This is a risk you cannot avoid when you invest in any equity. An active fund also has active risk — the risk that the fund may underperform the market. Your brain can accept risks that you are forced to take (read market risk) but not the ones that you choose to take (read active risk). Another boring investment is bank fixed deposit as this provides stable income.

The upshot? In the present-day world, real estate and gold are like comfort food — you should have it, but in small quantities. It is better to have a significant proportion of your wealth in financial assets such as index funds and bank fixed deposits.

The writer is founder of Navera Consulting. Send your feedback to [email protected]

Published on September 01, 2019
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