The Indian equity markets have always been a hot topic for discussion, especially among retail investors. With the market’s inherent volatility, many investors experience losses, and it’s easy to blame the market for those setbacks. But is it really the market causing the losses, or could it be our own actions? This article explores the critical question: What is really responsible for these losses—markets or individual behaviour?
Market volatility
The Indian equity market, like any other, moves in cycles. It is influenced by macroeconomic factors such as inflation, interest rates, corporate earnings, and global geopolitical events. Volatility is a natural part of this landscape, and temporary fluctuations often result in short-term losses. However, long-term investors typically benefit from these ups and downs if they stay invested with the right strategy.
But are market movements the only reason for losses? Let’s dig deeper.
Behavioural biases
Behavioural finance, a field that combines psychology and economics, suggests that investor behaviour is a significant factor behind losses. Often, it's not the markets but our own decisions that lead to poor outcomes.
Here are some of the key behavioural biases that may cause losses:
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Herd mentality: Many investors tend to follow what the majority is doing, especially in a rising market. Buying stocks when everyone else is buying might lead to paying overvalued prices, leading to losses when the market corrects.
Overconfidence: After a few winning trades, investors may become overconfident, believing they can time the market or pick ‘hot stocks.’ This often results in risky investments and, consequently, significant losses.
Loss aversion: Investors are generally more sensitive to losses than to gains. As a result, they might sell at the first sign of a market dip, turning a temporary loss into a permanent one.
Short-term focus: Equity markets reward patience. However, investors often focus on short-term performance and get spooked by daily or weekly market movements, leading to hasty decisions and missed long-term gains.
Lack of planning
Often, investors jump into equity markets without having a well-defined financial plan. They might lack clarity on their risk tolerance, investment horizon, or financial goals. Without a strategy in place, the temptation to chase returns or exit prematurely becomes overwhelming, further contributing to losses.
Investing without a clear plan is like sailing without a map—you’re bound to get lost.
Time matters
One of the biggest mistakes investors make is attempting to time the market—buying low and selling high. In reality, even seasoned professionals struggle to predict market movements accurately. Data has consistently shown that staying invested over the long term yields better results than attempting to time entry and exit points.
For instance, those who stayed invested in Indian markets over the last decade, through market corrections and recoveries, have seen substantial gains.
Decision-making
Emotions play a huge role in financial decision-making. Fear and greed are two powerful forces that often lead investors astray. During market booms, greed takes over, pushing investors to invest more than they should in high-risk stocks. Conversely, during market crashes, fear can cause panic selling at the worst possible time.
Conclusion
While market volatility can lead to short-term losses, it is often the investor’s behaviour that causes long-term financial damage. By understanding and controlling emotional responses, sticking to a long-term investment plan, and avoiding the temptation to time the market, investors can significantly reduce their chances of incurring heavy losses. In the end, the market isn’t out to get you—it’s often our own decisions that make the biggest difference between success and failure in investing.
In the game of investing, you are often your own biggest adversary. By recognizing and mitigating behavioral traps, you can shift the blame away from the market and take control of your financial journey.
(Author is the Founder of Money Mantra, a personal finance solutions firm)