Investor behaviour

It is rightly said “Bull Markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria”. (By John Templeton)

This explains the complete investment behaviour. We, as investors, tend to get pessimistic when the markets are in a bearish phase. But most of us forget that this is just a part of the market cycle. The revival is all set to turn the market to the next stage of the cycle i.e., the recovery phase, eventually leading to the bull market phase. Initially, the growth is also doubtful during bear times. However, ignoring those opportunities, we get a sudden urge to invest when the markets are about to mature. At last, all the excitement builds up when the markets are about to repeat its cycle…. end of the bull run.

“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions”. (By Seth Klerman)

An Investor’s behaviour has the most vital impact on his/her investment portfolio. Most investors tend to do the opposite of what they are supposed to do. Breaking the market into three stages:

Bullish Stage: Investors tend to get positive and excited seeing the markets reaching its highs. In over optimism, they expect the markets to move positively further. These highly positive expectations of the investors make them invest when the market is either expensive or overvalued. When this phase ends after a saturation point, markets automatically revalue themselves. We emphasis that one should always try to remain within his asset allocation limits during these times.

Sideways Movements: This is also a part of the market cycle, where there will be a sideways movement every now and then. Lack of patience makes the investor withdraw or redeem their funds from the markets due to lack of volatility. Instead, a recommended course of action is to actually hold.

Bearish Stage: The markets are full of doom and gloom during a bearish stage, every market stage has its mature stage as well. Surrounded by all the pessimism, the general investor withdraws his funds from the market. Instead, the market is at one of its lucrative entry points, this is the time to acquire it at a cheaper price.

Conclusion

Sentiments rule investment behaviour. During these certain phases discussed above one shouldn’t get overwhelmed by his/her emotions, hence managing his/her investment behaviour. Financial behaviour management can reward investors in the most lucrative way possible!

-By Akshay Pasricha