Being a passive investor is about letting your emotions sleep

Written by Lisa Pallavi Barbora

Lisa Pallavi Barbora is a Senior Consultant for Content at WFAN. Lisa is also a founder of MoneyPuzzle.in In her earlier avatar, she was a National Writer and Consultant for HT Mint - a premier business journal in India.

March 31, 2021

If you want to grow your wealth over time, having an adequate investment portfolio should be a priority. Keeping your money in bank fixed deposits is not going to cut it for wealth creation. What you need to do is have a mix of other assets like equity and bonds too.

For most people switching from traditional investments like fixed deposits to market linked investments like equity is easier said than done. The volatile nature of daily market prices can be addictive and unnerving all at once. You’ll find yourself feeling elated or stressing over the investment value depending on the market price of a given day.

However, becoming too active in tracking such details can derail you from the original objective of wealth creation by making you focus only on what is happening at the moment.

The key is to sit back and become passive, the opposite of active. It means doing nothing, when your emotions are bubbling over to take some action. It means trusting the process of investing over the daily noise. Of course, this too is easier said than done.

Nevertheless, give it a try and here are some pointers to help you get through it.

1 – Don’t check your investment score everyday

Investing in market linked securities like stocks and mutual funds means that you will have a changing daily value for your investments. When it comes to investment habits, tracking this daily value is a big departure from how one invests in traditional options like deposits and savings certificates. It can be unnerving in times when market prices fall and you may feel elated when the opposite happens.

On most days you will be able to keep your emotions in check, but there will be days where the change is large enough to evoke an unmanageable emotional response, leading to reactive action.

This action may be selling out on your investments before time if you see a large interim fall in price or buying more when you see positive outcomes. Both reactions are unwarranted and need to be checked.

One way to promote passive investing is to disallow yourself from checking daily portfolio values and removing the unwanted noise altogether. If you are investing for 5-10-15 years, then checking your portfolio value can be a once a year or once in six months affair.

Remember, wealth creation through market linked investments happens best when you are not active. Do nothing.

2 – Don’t change your mind about where you have invested every year

Let’s also clarify that market linked investments will rarely give you returns in a straight line. You will see a lot of difference in annual returns. When you do sit down to check portfolio values at the end of a year, keep this factor in mind. It’s not easy to grasp, given how traditional investments don’t see any variance in their annual return, nevertheless, you have to understand that wealth creation through market linked investments happens in this manner.

It also means that in certain years your choice of funds or investments may not perform as you expected.

In times of underperformance rather than simply selling it or withdrawing the investment, you should check for reasons why.

Changing or withdrawing at the slightest sign of peril will increase your cost as you have to deal with taxation on gains and moving from one to another too often will not allow you to accumulate long term gains.

If the fundamental investment thesis, the fund manager, the process and portfolio structure are unchanged, you should not change your stance either, keep holding onto the investment. Do nothing.

3- Don’t follow the herd

Newer investment choices, mutual funds, stocks and bonds will keep coming your way. Chasing the next idea is not going to always help in wealth creation. As market prices move up and down, there is a tendency for majority investors to move in line with that change. Most will buy securities in a rising market and sell in a falling market.

This may help in securing near term return expectations but is hardly the way to grow wealth in the long run.

For the latter, you must continue regular investing in a steady manner regardless of which direction the market and the crowd of short-term investors is moving.

The next big investment idea is really doing more of what works, that is regular investments regardless of market cycles.

You don’t have to pile on new products, funds or stocks. You don’t have to buy what your neighbour is buying.

If what you are already holding in your portfolio matches your expectation, then simply add more of the same.

Remember, everyone has a different expectation from the same investment. You have to follow yours and not any other.

Following the herd in a thunderstorm can land you in a puddle, when all you needed was an umbrella to protect yourself from the rain.

Passive investing is about letting your emotions about your investment flow through without any actions being taken. It is about sticking to the process that works for long term wealth creation and it is about doing less rather than more.

Being passive means letting your emotions sleep, while your investments work silently in the background. Imbibe these behavioural traits and become a passive wealth creator for life.

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