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How to Stay Away From Emotions while Investing?

Shitanshu Kapadia
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How to Stay Away From Emotions while Investing?

Investing can feel like a rollercoaster, characterized by both triumphs and letdowns. Nevertheless, it is crucial to approach this journey with a clear mindset and a logical decision-making approach. Investing based on emotions such as fear, greed, or other feelings can result in making bad decisions and experiencing financial losses. These feelings can cause investors to make hasty decisions in purchasing or selling assets, typically leading to unfavorable results.  Previously, I have discussed – Emotions over investment, in this post we will discuss – How to Stay Away from Emotions While Investing.

Successful investors may be able to cope with this loss but you may not, which may cause strong disappointment and fear while making investments.

So million dollar question is:-

  • What does it take to become a successful investor?
  • How to win over emotion?

Let’s check out what you need to do to stay away from emotions while doing investments.

Investing Money

How to Stay Away From Emotions while Investing?

Set Clear Investment Goals

Differentiating between short-term and long-term investment objectives is crucial. Having short-term goals could involve setting aside money for a trip or buying a car, whereas long-term goals usually revolve around planning for retirement or creating wealth over many years.

A specific investment strategy ensures that your investment choices are in line with your financial goals. Having a clear strategy is essential for reaching your objectives, whether you want to increase your capital, generate income, or preserve wealth.

Do Your Independent Research Before Investment

Knowing what you are buying is key to avoiding emotional setbacks. Always do independent research before making any investment, even if you are taking advice from a financial advisor

Always understand your investment how it will help you to achieve your goals and what risk is involved in that.

Without your own research, you may not take full responsibility for your investment and end up involving negative emotions, which inspires you to make mistakes. You can make use of Fundamental analysis or Technical Analysis for doing research.

Fundamental Analysis

Fundamental analysis is the process of assessing the financial condition and success of a company or asset in order to gauge its inherent worth. Earnings growth, revenue trends, and industry dynamics are factors that are taken into account in fundamental analysis.

Technical Analysis

Technical analysis involves analyzing historical market data, specifically price and volume trends, in order to predict future price changes. Technical analysts utilize charts and indicators to recognize trends and patterns that could signal possible buying or selling chances.

Set Financial Goals

Setting financial goals is the first step to investing. Write down your long-term financial goals and how much volatility you can tolerate comfortably.

Stick to your financial goals, don’t allow short-term ups and downs in the market to make your investment decisions. Read your financial goals whenever emotions try to take over your mind.

Diversification

Diversification can help to control your emotions because it offers some downward protection. Diversification means having different asset classes in an investment portfolio. It includes investment classes such as real estate, and commodities to hedge against market uncertainty.

 A diversified portfolio can hold up relatively well in most market conditions.

Stop Checking Your Investment Portfolio Constantly

Reviewing investments monthly or quarterly is a good idea but some of investor has a habit of checking investment portfolios every day or every hour. If you are doing the same stop doing that. It will not benefit your portfolio in any way, it will just cause more anxiety. Checking your investment too often can cause you to panic/fear and you can make a snap reaction trade. Just stick to your plan and ignore everyday market movements.

Money is always an emotional subject, but often when our emotions get involved with our investments we will make wrong decisions which will end up costing us too much. Keeping emotions out of investing may seem difficult but if you follow the tips above you should be able to accomplish it.

Keep Emotion in Check

Recognizing emotional triggers

The initial step in managing your emotions during investment is to comprehend your emotional triggers. Knowing about these triggers, whether it’s the fear of missing out (FOMO) or the fear of losing money, can assist in making more rational investment choices.

Using rational thinking

Making decisions based on logic, analysis, and evidence instead of emotions is what rational thinking entails. By concentrating on evidence and numbers, investors can prevent emotional biases and uphold a disciplined investment approach.

Seek Professional Advice

Financial advisors offer helpful advice and skill to assist you in navigating the intricacies of investment. Whether you are new to investing or experienced, consulting with a knowledgeable expert can assist in making wise choices and reaching your financial objectives.

FAQs

1. How do emotions affect investment decisions?

Emotions such as fear, greed, and excitement can cloud judgment and lead to impulsive investment decisions that may not align with long-term goals.

2. Is it possible to completely eliminate emotions from investing?

While it’s challenging to completely eliminate emotions from investing, investors can learn to recognize and manage their emotions effectively to make more rational decisions.

3. What are some common emotional biases in investing?

Common emotional biases include confirmation bias, where investors seek out information that confirms their preconceived notions, and loss aversion, where investors fear losses more than they value gains.

4. How can I stay disciplined during market downturns?

Maintaining discipline during market downturns requires sticking to your investment plan, focusing on the long-term, and avoiding knee-jerk reactions to short-term fluctuations.

5. Why is it important to seek professional advice when investing?

Professional financial advisors can provide personalized guidance, expertise, and objective insights to help investors navigate the complexities of the market and make informed decisions.

Emotions Over Investments: Buy Low Sell High

Shitanshu Kapadia
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0
Emotions Over Investments: Buy Low Sell High

“Buy low, sell high.” It’s the golden rule of being a successful investor. You’ve heard this rule too many times, and you know it makes sense. Yet time and again, you find yourself doing the exact opposite. Most of us allow our emotions to play a big role the way we invest.

As we are unable to control our emotions we make mistakes, Emotions such as fear and greed. Fear of losing money holds back even those investors who have bright possibilities ahead of them. On the other hand, greed makes them make decisions that might make them lose more money they can make. Let’s discuss why these emotions come in between, and what we can do to stay away from such emotions.

Emotions Over Investments: Buy Low Sell High

Social burden

We are social animals and the social burden always is always present on our shoulders. A good house, a secure future for children, a comfortable lifestyle for spouse and parents, a smooth retired life, and the need for social status are the needs that make us greedy. The lack of any of the above may cause an inferiority complex or fear in us.

This inspires us to make the wrong decisions or wrong investments.

Confusion

The fear of losing everything and the greed of achieving everything create a conflict and confuse us at times of making investments. As we know Investment is all about putting the right amount of money into the right instruments at the right time. Let’s take a simple example.

 What do we do in the case of the stock market?

“If the stock market goes up we don’t buy because of fear it may crash, if the market goes up again we wait & don’t buy because of fear the market may crash.

Instead of buying at low, we are waiting, and suddenly we find everybody is getting into the market like dot com companies, we lose control as we have emotion that we will be left behind and instead of buying at low we will end up buying at high. After some time, the market crashes, and instead of buying at low due to fear of losing we end up selling.”

Market Cycle

So we do exactly the opposite which is foolishness caused by our emotions. Believe me, this emotion is the culprit for leaving us behind.

Burning Desires

Everyone wishes to have a luxurious car or a big bungalow as early as possible. These desires force us to invest in risky investments such as equities in the hope of getting higher returns quickly.

These shares may give returns that are higher than other instruments but if you make losses that are also terrible.

Following Other People

Many people think that following a successful investor like “warren buffett” will help. However, you need to keep in mind that every individual has different risk-taking capabilities, goals, and wants. Investment done by others may not be the right investment for you.

A successful investor may be able to cope up with loss but you may not, which may cause strong disappointment and fear. You may take advice from professionals but blindly following anybody is not a good idea.

FAQs

How do emotions influence investment decisions?

Feelings like anxiety and desire frequently lead investors to make illogical investment choices. Fear may cause investors to sell quickly when the market is falling, while greed can lead to hasty purchases when the market is rising.

What is the significance of “buy low, sell high” in investing?

The basic concept of “buy low, sell high” stresses the importance of buying assets at a low price and then selling them when their value increases. The goal is to optimize profits by taking advantage of market inefficiencies.

How can investors overcome emotional biases?

Recognizing emotional biases is the first step for investors to overcome them, followed by implementing strategies like setting investment goals, diversifying portfolios, and maintaining a long-term view. Consulting with financial experts can also offer valuable counsel.

Why is buying low important for investors?

Purchasing assets at a lower cost enables investors to attain discounted prices and possibly achieve greater returns in the future with improving market conditions. It also diminishes the chances of paying too much for assets and enhances the safety buffer in investment choices.

What are some practical tips for selling high?

When trying to sell at a high price, investors should concentrate on recognizing assets that are overpriced by using fundamental analysis and market trends. Establishing precise exit criteria and adhering to a planned selling approach can prevent investors from making emotional decisions and successfully secure profits.

Why You Should Avoid Personal Loans

Shitanshu Kapadia
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Why You Should Avoid Personal Loans

Personal loans can seem like an attractive option when you’re facing financial challenges or considering a major purchase. In today’s world income is limited but desires are endless. This desire often inspires us to take additional debt using credit cards or personal loans. personal loans can often lead to financial strain and should be approached with caution.

I advise you not to take any personal loan unless it is an extreme situation. Keep a personal loan as your last option to avail your immediate cash requirement.

Personal loans can be used for any purpose including medical expenses, marriage expenses, home improvement, purchasing household items or to pay your credit card debt. The best part is that you need not inform the bank about the purpose of taking a personal loan. In this way, personal loans are all-purpose loans.

In a home loan, car loan, or education loan you have to prove that you will be using this amount for said purpose only. A personal loan has one additional advantage the processing time of this loan is faster compared to any other loan. Most banks do not ask for any guarantor or any security deposit for this type of loan.

Due to this you might be thinking that this is the best loan option but believe me this is the worst loan option. Let’s discuss in detail why you should think of a personal loan as the last option.

personal loans

Why You Should Avoid Personal Loans

High-Interest Rates 

The interest rate charged by banks under personal loans is 14-18%.

Let’s understand the facts by taking an example. Mr.X has an urgent need and he is taking a personal loan of 5,00,000 Rs/- an interest rate of 17% for 5 years. The effective EMI for this loan will be 12,426 Rs/-.

This loan will cost around 50% additional money as interest – 2, 45,560 Rs/-

Personal Loan Example

Personal Loan Example

This can result in significant interest charges over the life of the loan, making it more expensive in the long run.

Prepayment Penalty

Most lenders don’t allow part payment of loans. This means you end up paying the loan for the entire tenure of the loan. It can work out quite expensive since your initial installments go towards interest payments.  Some banks allow prepayment but they keep very high penalties for the prepayment of the loan.

Hidden Charges

Many banks keep certain hidden charges which make this loan more costly. Most of the borrowers forget to read the offer document/terms and conditions and may end up paying more.

Credit Score Impact

Obtaining a personal loan can harm your credit score, particularly if you already have a high debt-to-income ratio or a track record of tardy payments. Failing to make payments on time or defaulting on the loan can worsen your credit score.

Possibility of Entering a Cycle of Debt

Individuals who use personal loans to pay for their expenses could become stuck in a pattern of debt, continuously borrowing to fulfill their financial responsibilities. This could result in a negative cycle of mounting debt and financial strain.

It is usually advisable to stay away from debt but if you have a pressing need for cash & you can afford to repay it in a short period of time it is advisable to take a loan against assets like gold or property compared to a personal loan.

Lastly, decide if you can stay away from any loan. While this loan may be useful in certain instances like medical emergencies, it doesn’t make sense if you are using it on your vacations or any other fun-making expense.

FAQs

  1. Are personal loans ever a good idea?

    Personal loans can be a viable option in certain situations, such as consolidating high-interest debt or funding a necessary expense. However, it’s essential to carefully consider the terms and potential impact on your financial health.

  2. How can I qualify for a personal loan with favorable terms?

    To qualify for a personal loan with favorable terms, you’ll typically need a strong credit history, stable income, and a low debt-to-income ratio. Shopping around and comparing offers from multiple lenders can also help you secure the best possible terms.

  3. What should I do if I can’t afford to repay my personal loan?

    If you’re struggling to repay a personal loan, contact your lender immediately to discuss your options. They may be willing to work with you to modify your repayment plan or offer alternative solutions.

  4. What are the alternatives to personal loans for financing major purchases?

    Depending on your financial situation, alternatives to personal loans may include using savings, taking advantage of low-interest credit options, or exploring financing options offered by the seller, such as installment plans or store credit cards.

  5. How can I avoid falling into a cycle of debt with personal loans?

    To avoid falling into a cycle of debt, it’s essential to borrow responsibly and only take out loans for necessary expenses or investments. Additionally, focusing on building an emergency fund and improving your financial literacy can help you avoid relying on loans in the future.

How Multiple Home Loans Can Reduce the Tax Load?

Shitanshu Kapadia
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How Multiple Home Loans Can Reduce the Tax Load?

In 2016, Anandbabu took taken home loan and purchased his dream home in Ahmedabad. The home loan amount was Rs 7 lakh for 15 years & EMI was Rs 7,200. However, two years later he was transferred to Surat.

Instead of renting a home in Surat, Anandbabu has bought another house, He could have sold the old house to purchase a new house but Anandbabu has decided to go for another home loan of Rs 15 lakh for 20 years, for which EMI is about Rs.16,550.

Now Anandbabu has to pay a total EMI of 23,750 Rs/-every month, increasing floating interest rates are making it difficult to pay this hefty EMI amount for both home loans. Anandbabu is in the highest tax bracket and has to pay 30% tax. Which makes it further difficult to save enough to pay both EMIs. Anandbabu was not fully aware of section 24 of income tax. Especially about the fact that his tax load can be reduced by availing deduction facility on a home loan in case of a second home. Let’s understand section 24 income tax benefits of home loans.

Multiple home loan tax benefits

How Multiple Home Loans Can Reduce the Tax Load?

Multiple home loans refer to the scenario where an individual holds more than one housing loan simultaneously. These loans could be for purchasing different properties, constructing homes, or renovating existing ones. The primary motive behind availing multiple home loans often revolves around investment diversification and wealth creation.

Home loan repayment has two components principle and interest and both of these components are treated differently for tax calculation purposes.

Principle Component – 80C (1.5 Lakh Limit)

In India, taxpayers can claim tax deductions on the principal amount of their home loan repayments as per Section 80C of the Income Tax Act. According to this provision, people can deduct up to INR 1.5 lakh per year for the principal repayment of their home loans.

Interest Component – Section 24 (2 Lakh Limit)

Additionally, the interest paid on home loans is eligible for tax benefits under Section 24(b) of the Income Tax Act. Homeowners can claim deductions of up to INR 2 lakh per annum on the interest component of their home loan repayments, provided the property is self-occupied. For properties that are let out, there is no upper limit on the interest deduction.

Tax Implications of Multiple Home Loans

Deductions under Section 80C

Individuals can avail deductions under Section 80C for the principal repayment of each loan when they have multiple home loans. This enables borrowers to make the most of their tax advantages by diversifying their investments among a number of properties.

Tax Deductions under Section 24(b)

Likewise, the interest incurred on every mortgage can be deducted for taxes according to Section 24(b). By utilizing this benefit on various properties, people can greatly lower their taxable income and total tax responsibility.

Impact on Capital Gains Tax

Apart from the advantages mentioned earlier, having multiple properties can also assist in reducing capital gains tax responsibilities. Individuals are eligible for exemptions on capital gains from selling a property by reinvesting the money in several residential properties, according to Section 54 of the Income Tax Act.

By strategically taking advantage of tax deductions available for multiple home loans, people can effectively reduce the amount of taxes they owe. Optimizing the distribution of principal and interest repayments among different properties can maximize tax advantages.

Although several home loans come with substantial tax benefits, borrowers should be cautious of the risks involved. These consist of possible limitations on cash flow, changing interest rates, and regulatory adjustments that could affect the real estate industry.

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