“If you cannot control your emotions, you will not control your money”
– Warren Buffett
2023 marks a significant year of achievements for the Indian market, with another noteworthy milestone reached today. Following the recent attainment of the 21,000 mark by the benchmark Nifty in the first week of December, the Sensex has now crossed the 70,000 milestone in intraday transactions on 11th December 23. In contrast, 2020 saw many uncertainties and surprises come our way, including extreme fear and even a glimmer of hope.
From 2020 till 2023, there has been a labyrinth of emotions like hope, denial, belief, anxiety and euphoria. In a world, where economies assume that humans make logical and rational decisions based on weighing all the factors and evidence to make the most sensible choice. But in reality, the investor’s psychological stage can overrule their rational thinking during stress- a result of euphoria and panic situations. Taking a realistic approach to investments in every scenario, (whether euphoric or fearful markets) is essential.
Investors who enter into investments with a base-level understanding of the risks involved can mitigate a great deal of the emotions associated with investing. Emotional investing entails the investor into a web of impulsive behavioural instincts that rule their investment decisions. There are acknowledged phases which come over time as a function of emotional investments during Bull and Bear markets. They are normally seen over large tranches of time, probably over a decade.
Your investment philosophy during a bull market
The bull markets are largely influenced by emotions like hope, disbelief, emotional high, and optimism. The bull market experiences transitions from a state of hope to euphoria. The prolonged stage of the downturn finally sees the dawn of ascent and the belief of optimism arises in the investors. Investments turn to Emotional investments when the market reaches the euphoric stage. The longevity of the positive trends sets the confidence of the investors at its peak and trouble occurs when investors disregard the risk and believe that success has no limits.
How to save yourself in the racing bull market?
Reiterate your financial goals- Investors necessarily need to remind themselves of their investment philosophy so that they can focus on their goals and not get swayed by the wave of euphoric situations. By adhering to a well-defined investment strategy, individuals can maintain a clear perspective, avoid succumbing to market hype and make decisions that align with their long-term objectives. This deliberate approach safeguards against the potential pitfalls of emotional reactions during periods of market exuberance.
Avoid the herd mentality- Staying true to your financial goals is the only way to manoeuvre this positive trend of markets high. Following herd mentality may lead to suboptimal decisions and that might disturb your individual financial goals and objectives. Following a systematic approach safeguards against impulsive actions driven by the collective behaviour of the crowd and ensures that your financial journey remains aligned with your specific objectives.
Awareness and self-control- Being aware of your financial needs and plan is essential. Predominantly during a bull market, the overconfidence shown by the investors evokes unnecessary expectations and there is deviation from your original plans. Practising resistance and self-control is difficult but discipline and a strong principle of investing facilitate better control over emotions while investing.
Situations in a bull market
- Market High + Emotional High = Buying Behavior.
- Emotional Acceptance with Hope + Optimism in the Market = Buying Behavior.
- Positive Economic/Market News + Happy Emotions = Buying Euphoric Behavior.
Your investment philosophy during a bear market
The bear markets are largely influenced by emotions like panic, denial, anxiety, complacency, and self-doubt. Investors tend to invest themselves in these pessimist emotions, especially in a bear market. The progression of market sentiments from the glimmer of hope for a positive rebound to stock offloading grapples the investors with financial setbacks. The frustrations of the investors reach a level where financially drained investors decide to exit the market and swear not to participate in future.
How to uplift yourself in a bear market?
Protect yourself from loss aversion - People are risk averse- they want to avoid losing money wherever possible. In bear markets, where losses are mostly inevitable, the investors must trust themselves and hold on to their stocks. The irrational bias largely occurs when investors hold on to their investments for a long period or with expectations of a rebound. Investors can avoid being in this coup by maintaining a dynamic balance and following a steady head approach
Focus on the long-term - If you are an investor, then your vision should always be long-term during the extreme market descends. There is no certainty on the market revival but enough faith should be entrusted to your investment philosophy and hope for an early market revival.
Situations in a bear market
- Market Crash + Emotional Shock, Fear & Panic = Selling Behavior.
- Emotional Confusion & Uncertainty + Market Volatility = Many Types of Behavior I.E. Panic Selling, Hold or Buying.
Growing wealth sustainably is not about greed, fear, or hope. It’s about safeguarding finances, preserving peace of mind, and ensuring a legacy of financial success for all generations. Manage your behavioural impulses that can be triggered during the market ups and downs through the Zen of Investing.