Let’s face it, we all go through times when our financial decisions have gone wrong. A stock that plummets, a deposit friendly and high-interest finance company going bust, or a bond which is on to dangerous levels of default. Great, if we can press in the Ctrl + Z, to undo, but have we asked ourselves the big and important question about the flip side before we decided to invest?
Anger and frustration are quite common during the time of adverse financial conditions, but our reactions decide our future approach to investments, our resilience and our ability to bounce back to normalcy.
Sadanand 36, invested in stocks of two companies with a surplus cash of INR 5 lacs which he had saved over the last 3 years. After a lot of discussion with this colleagues and friends he was convinced that investing in Mid-Cap stocks would yield him great returns in a year’s time. He also took the time to look at mid-cap stocks which have had a great rally over the last one year.
His split the money in two and invested equally in stocks which he proudly claimed were handpicked by him after a lot of research and discussion with his friends and colleagues who also hold similar stocks. Sadanand kept telling his wife that he was going to make a fortune as trading and investing in stocks is the only and best way to double the money or make more than 30% returns on capital. He was positive about doubling his money in two year’s time.
Large Cap stocks have a history with plenty of reviews that an investor can bank upon. They grow over time but checking if the stock has peaked recently is sometimes a tricky one for even the best brains in the market. But here’s the thing about mid-cap stocks; in a failing market the hard hit ones are the mid-cap stocks. The fall is bottomless! In the first year, the mid-cap stock had a brief rally and started falling. By the end of the year Sadanand lost 35% of his capital. Two years down the line and his stocks rendered him with a total loss of 45%. He held on to the mid cap stocks, while he received a lot of advice about selling it. He did not reveal the loss to his wife or family. He gave it one more year and sold both his stocks and exited with the 73% loss.
What were Sadanand’s wrong moves?
Holding on and Hoping but just not enough: Sadanand held on to the wrong stocks hoping it would recover in the time he thought was enough for recovery.
Suppression and Denial : He refused to accept his losses and lived in self- denial. Talking about it to his family or an investment advisor would have helped in correcting his course and minimizing losses.
Not introspecting: Sadanand wasn’t even in the least introspecting. He picked up the stocks and kept thinking it was the best choice. Introspection would have led to corrective action. An early sale, or diversification into large cap stocks or mutual funds.
Lack of information credibility: Sadanand learnt from unauthentic sources. Peers or people who were invested in the stock. Seeking professional advice would have radically changed his investment decision.
Wrong motive: Sadanand was just a little less of a speculator. Quick and easy money almost never happens. He tried to time the market over a weak or incredible choice of stocks. When it comes to equity, a prudent advisor will pick the right mix of stock and encourage you to stay invested.
Portfolio diversification and seeking professional help are critical aspects when it comes to investing in equity. Introspection and corrective action too needs advice and options from professional financial planners.