Making portfolio review an emotional activity: Act on investments that incite fear, guilt or shame in you during rebalancing
It’s that time of the year when we review our portfolios. The financial year has ended and we will prepare to get the numbers organised for tax filing. While we are at it, we would like to see if the portfolio needs any modifications. There is the simple math of diversification, strategic long-term asset allocation, evaluation of our financial goals, and our income and saving realities. Beyond these are the emotions that accompany our portfolio review.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
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Is there an investment in the portfolio that has been disappointing? We would like everything looking good and delivering a positive return. However, as we scroll down, we find that the investment in long-term debt has not done well. While mid caps and small caps are all right, the large-cap stocks and funds could have done better. We thought that housing prices would go up and the flat we booked would appreciate, but alas, this has not happened.
Worry not. These are signs that the portfolio is well-diversified. If everything were to do well at any point of time that we reviewed it, we could be holding too much of the same thing. Asset class performances are always mixed. Some go up, while the others go down. The ones that are down hold the promise of participating in a future upturn. Prepare to be disappointed and see it as a good sign.
Dislike, fear, urgency
If your portfolio has an asset you don’t like or are unwilling to stay invested in, you should consider whether you sought adequate information before investing. If you don’t like something, it’s likely that you bought it under pressure or persuasion. If your holding lacks conviction, you may want to mark it for further understanding.What you feel is likely to be a disappointment if you knew what to expect. However, dislike is different. You don’t understand the performance of a product, especially if it is underperforming. Find out an investment thesis for staying; write down three reasons why you should hold the product; form expectations for the future based on information and knowledge. Something you dislike needs attention and more homework.
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Is there something in your portfolio that evokes fear? Has a stock you own shot up a lot in the past year, making you worry it may fall? Is the drop in the value of an asset you hold creating fear that you are about to lose a lot of money? Fear arises from a misalignment of your risk preference and portfolio composition.
If you are not an aggressive, long-term investor in equity, any appreciation will trigger an emotion that a crash is imminent. You will want to cash out before it is too late. If you panic at a loss and can’t take market downs with equanimity, your appetite for risk and the ability to bear downside risk might be lower than you gave yourself credit for. Or it may represent an over-extended or leveraged position that is riskier than your finances can bear. See fear as a sign to realign the portfolio to your experience with respect to risk. You may have ticked off the risk questionnaire hypothetically, but may feel different when faced with an actual loss.
Is there something in your portfolio that creates a sense of urgency to act immediately? Behavioural science shows that such an emotion is most likely associated with unexpected gains rather than losses. When you see that a product has performed much better than anticipated, you will feel the temptation to hold more. The appreciation in the recent past does not create fear but an exhilaration that one must add to one’s position.
Everyone and his uncle now believes that gold is the asset class to hold. Even if the prices have moved up, every theory to support a further rise in price is searched and believed to justify further investments. That sense of urgency of wanting to act now must be recognised for the harm it can do to your portfolio. You will be overweight in an asset class that has already exceeded expectations and is overvalued already. You will enter at a high price and set the bar high for the future. Worse, your asset allocation might go out of whack with your long-term goals.
Bull markets in any asset class fly to new highs because many investors become willing to participate at higher and higher prices. This self-fulfilling prophecy is fuelled by buyers who show great urgency to act, and fear being left out. If you choose to be overweight in gold, arrive at your percentage allocation for gold and do not dramatically alter your asset allocation.
Guilt, shame, regret
Does looking at your portfolio trigger a feeling of regret? Do you feel that you should not have bought the stock that your friend recommended? Do you feel upset that you did not allocate enough to gold when you checked the portfolio last year? Do you feel you should have sold a stock last year, instead of waiting and watching it lose even more this year? Do you think you should have invested the money you held in the bank, unutilised?Regret is wisdom in hindsight and a useless emotion. As you can’t go into the past and change things to feel better, regret is unhelpful. However, negative feelings of guilt, shame, and regret are tough to deal with. Research shows that many choose inaction, denial, secrecy, selective amnesia, and avoidance when they feel these emotions. Many don’t sell a losing position because they do not want to experience the regret of having made the wrong decision. Inability to act is associated with these feelings.
In a portfolio review, you can pick up portions that you are not especially proud of, and ask if you want to act on a small portion. Maybe sell a bit? Invest a little? Take a small loss? These actions can trigger a better response when you see your portfolio next.
It is a tough act keeping your portfolio aligned to your goals and risk preferences. Emotions can guide your actions if you can interpret them in your interest. The portions of portfolio that make you feel elated, proud, and accomplished need no further action. Those components keep you going and enable you to stay invested. Lean on them to deal with the other not-so-positive emotions.
The Author IS CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING
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This story originally appeared on: India Times - Author:Faqs of Insurances
