The psychology of investing: Why handling one’s behavioural issues is key to navigating the markets

Mastering psychology is not just an advantage in investing, it is the foundation of long-term success, say experts. "When market rise persists, joy leads us to believe the upward march will never end. On the other hand, the erosion of market prices ends in panic and a hallucination that tomorrow will bring further devastation. Yet, both feelings are mere illusions, shadows cast on reality,” says Siddharth Maurya, founder and managing director of Vibhavangal Anukulakara Private Limited.

Overconfidence, which often results in greed, gets heavily amplified during market highs. Buying overpriced assets, over-leveraging, and expecting endless profits are some of the outcomes. In contrast, the fear of a market dip can cause excessive panic, resulting in choosing the wrong time to invest. “Excessive optimism and the fear of missing out on profits are the primary causes for overexposure and over-risking during a market uptick. During a market downturn, fear takes over,” says Aman Gupta, director, RPS Group. Thus, fear and overconfidence are equally undesirable. 

The key is finding the right balance: remaining calm when the world is euphoric and rational when everyone else is panicking. Discipline, patience, and emotional temperance are the invisible compasses of an investor.

More importantly, investing is not about predicting storms; it is about navigating through them. “Money follows the mind; a restless mind makes poor choices, while a calm one fosters significant wealth. Emotions are powerful companions but terrible decision-makers,” says Maurya. 

While numbers, graphs, and data points cannot be neglected, what drives long-term results is the ability to deal with the emotional extremes of the market, says Gupta. “The art of managing investments is more about handling behavioural issues rather than anticipating market changes.”

Typically, investors panic and cash out, often locking in losses rather than waiting for the market to recover. These emotional reactions, far from being rational, can even undo a strategic financial plan. “Most people believe that wealth creation is all about choosing the right stock, property, or mutual fund. The truth is, it is about having the right mindset. Emotional factors such as greed and fear tend to dominate rational thought and judgment. This, in turn, causes investors to make rash decisions that go against long-term plans,” says Jetaish Gupta, founder and director, Adore Group.

For instance, consider the decision of buying a car versus investing in a property. People buy cars for ₹15 lakh, which starts to depreciate the moment you take it out of the showroom. On the other hand, people tend not to buy a property because they “fear” the real estate market. Ironically, that property could appreciate significantly over a decade, while the car will likely continue to depreciate. This reflects the struggle between long-term rational thought and short-term emotion. 

Designing a disciplined investment structure, according to experts, is the most effective solution. Investing without assessing the goal, risk, and time horizon is like setting sail without a destination. Such clarity, to a degree, acts as a stabilising force during attempts to sway using emotions. Clear-cut goals, risk appetite, and time frame make it easier to ignore herd mentality. The ability to ignore volatility is further helped by diversification and systematic investment plans (SIPs).

“During turbulent periods, having a well-thought-out investment plan, with a clearly defined set of goals, an appetite for risk, and a time horizon, serves as an anchor,” says Jetaish Gupta. “Emotions can be kept in check through automating investments with SIPs, diversification over different asset classes, and avoiding herd mentality.”

Aman Gupta emphasises behavioural biases. “Identifying biases such as confirmation bias, loss aversion, and herding effects is vital in decision-making. Acknowledging them enables you to think before you act reflexively.”

At the end of the day, wealth creation is a marathon, not a sprint. Removing emotion from execution by sticking to the financial plan will turn volatility into opportunity.