If done with discipline and patience, your investments can fetch enormous wealth, but if done carelessly and impulsively, they ruin all your savings.

As Warren Buffett says, “The stock market is a device for transferring money from the impatient to the patient.” Be it the stocks, mutual funds or any other form of investment, impulsive and emotional decisions are detrimental to your financial health.

Before we talk about ways to avoid impulsive investment decisions, let us look at different types of investors and their traits.

Though one can find classifications done by various schools of thought, broadly, investors can be divided into:

1. Cautious/Guardians: These investors are conservative and look for financial security. They prefer safe, relatively low-volatility, investments with little potential for loss. They avoid high risks and also tend to overlook financial advices. In the process, they might miss out on some good investment opportunities.
2. Informed/Methodological/Technical: For this category, the investments are usually conservative in nature as the investors continuously look out for facts and information related to their investments. The people are financially confident and also listen to financial advisors for their decisions. Risk is fairly managed in this case.
3. Individualistic: These investors take their own decisions, conduct their own studies and are also confident in their ability to make investment decisions. They do take risks, if they find returns are justifiable with their balanced and analytical approach.
4. Casual: Exhibiting some mix of the above, these investors tend to be more of the ‘buy and hold’ type. They do take professional help at the beginning, but then do not continuously track or alter their portfolio according to their needs and changing circumstances. Their returns might not meet their goals and their risk oscillates significantly throughout the tenure of the investments.
5. Spontaneous/Adventurer: These investors tweak their decisions as per changing market conditions out of fear and greed. High turnover of their portfolio is a common phenomenon, as well as high risk, owing to their spontaneous reactions to market moments.
6. Impulsive/Emotional: Quite similar to the spontaneous category, the impulsive investors, as described by John Schott in his book Mind over Money, tends to take decisions on their feelings and emotions, rather than facts and studies. They are quick in both buying and selling. They also follow hot tips and hearsay. Taking all together, their portfolio exhibits higher risks.

As observed, spontaneous and impulsive investors carry the highest risk. One should avoid such practice. But how? You should understand that intuitions and feelings are among the factors that determine investments, but these are not the only ones. There has to be a clear layout of planned investment, be it a long-term goal-oriented portfolio or a short-term trading portfolio. The portfolio needs to be continuously watched, analysed and re-balanced, whenever needed.

Though investments depend on individual goals, risk appetite, preference for assets and time horizon, let us quickly look at some pointers to keep in mind during the pandemic.

1. One of the lessons we all learnt from the pandemic is to be adequately insured – both life and medical. In particular, if you do not have any medical insurance or you are not adequately covered, at least take some basic cover like Corona Kavach to start with.
2. Another lesson has been to have emergency funds. At least 3 to 6 months of household expenses need to be in liquid funds and FDs to meet any similar emergencies. This can be built over time.
3. Since markets have been volatile and stoking the fear of corrections, one needs to diversify across and within asset classes. For equities, one can still start with index funds and exchange traded funds (ETFs) and slowly get into large-caps with SIPs. Aggressive investors can also try to gain from sectoral play by investing in healthcare, IT and metals.
4. Conservative investors can put money into balanced funds, which also provide a cushion to the equity portfolio. Some allocation can surely be made in gold, as it always provides the perfect diversification and acts as an inflation hedge.

Do also remember what Albert Einstein said: “Three great forces rule the world — stupidity, fear and greed.” In investment, too, greed is a manifestation of hope, while fear is a manifestation of loss. We need to be careful while deriving the ‘emotional win’ to ‘get pride’ from our investments, in an attempt to avoid the ‘emotional drain’ coming out of ‘regret of loss’. So, there has to be a right balance between ‘emotion’ and ‘rationality’.

The writer is a CFA and HoD Financial Markets and FinTech, ITM B-School

DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.