Posted By: Admin
One of the challenges in investing in Equity Mutual Funds is that the negatives impact us far more than the positives.
If you had invested Rs 1 Lakh in equity markets a year ago and it is now worth about 1.25 Lakhs; while the profit of 25K makes you feel justified in making the investment, I don’t think the profit of 25K gives you great joy. On the contrary, if you had invested the same Rs 1 Lakh on 29th Jan and today that portfolio is showing a balance of Rs 0.90 Lakh as on date, i.e. a loss of Rs 0.10 Lakh on your investment. Granted that the investment was meant for a long term say 3-5 years, you would still feel extreme pain.
This concept was coined by legendary psychologists Amos Tversky and Daniel Kahneman way back in the early 90s, stating loss aversion alludes to the fact that “The pain of loss is far greater than the joy of gain”.
Loss aversion is a psychological state common to all investors and therefore leads to some strange behavioral changes
If you can’t sit calmly even when you equity portfolio is down 30 % due to market mechanics, then Equity investing is not for you. Take a long term view, review your portfolio and ensure that your investments are good ones… and then SIT TIGHT.
So while investing into Equity Mutual Funds, guard yourself against LOSS AVERSION, if you want your investment experience to be a PROFITABLE ONE.