Fear Of Loss Can Lead To Portfolio Underperformance

Being sucessfull in equity markets is all about managing fear and greed. In poor market conditions it is fear of underperformance that drives unprofitable investment decisions. Shohini Nath observes that fear indeed is the root cause that drags the portfolio returns. Read on as she shares 11 healthy investment practices to manage fear profitably.

- Shohini Nath

The markets may act nasty at times which spooks investors for sure. In such nasty times fear creeps in slowly and panic created leads to most investors taking wrong actions. Can we blame this fear on human psychology? If we were to ask someone, which is the biggest fear he/she has when it comes to investing money in the market, the answer is: “It is the fear of losing money”. No one clearly wants to lose even a penny. Studies over the years have suggested that the pain of losing is twice as strong as the joy of winning. It aches more to lose `100 when compared to the happiness of winning the same `100. There are ample reasons that create this illusion of fear in the minds of an investor when the markets do not behave as expected.

Humans are a complicated bunch, but everyone is unique in nature. Similarly, one person’s stimulus to fear would be different from the other. Fear is a personal experience and how we react to it thus depends on our previous experience. As humans, it is not just the experience we have had in the past, but also it could be an experience faced by a friend, a family member or even some story we have read. These are the influences that trigger our fear.

When an investor encounters a sudden correction in the market, the first instinct is to freeze and to wait. During this interval, the brain preps the person to take further action, which is to fight or take flight—either of the two moves decides the fate of the investor's equity portfolio. The end results of fight or flight are drastically different. Fight would help the investors to build requisite defenses, whereas flight would influence them to pack their bags and exit the situation (at a loss or minimum gain). Most of the investors would succumb to fear and lose out on the opportunities that fear prevents them from grabbing. Investors act melodramatic and lock in minor gains to avoid losses.