Investment success: Why behavior triumphs over macros?

There's innumerable research suggesting that investment success lies in the investor behavior than the analysis. Still, most of us try to spend enormous time in trying to figure out what is happening in the market, analyzing news about the various events and expending resources to forecast the possibilities or an outcome of an external situation. We modulate how such an event has a bearing upon the portfolio and draw out models with varying degrees of deviation. In the end, all these iterations might turn to be futile as it's impossible to figure out what's store in future.

This is what happened with multiple events in the past and the recent Russian fears of invasion over Ukraine had the markets in a spin. It's difficult to come to terms on how the market would respond during such international events and particularly during such macro events. While we ponder on how to protect our interests and losses against such an extreme event unfolding, the extent of damage depends on how any investor chose to respond at such times.

Of course, in this age of information overload, we're inundated with so much material information that can throw multiple scenarios of outcome. These are further amplified by the media which only incite our impulsive behavior to the fore possibly causing more harm. Investing has always been and would remain a boring affair, it consists of identifying the right-fit strategy or avenue and continue to stay invested till the end of the timelines.

But humans are wired to be stay with alacrity sensing for any lurking danger, this has been a trait that remained all through our evolution. This allowed us to not only just survive but also thrive and adapt to become a superior being on the planet. So, in pursuit of excitement or action, we tend to extrapolate any given situation and play our thoughts around it. We believe in bringing order and keeping things in control while the market or macro dynamics always produce disruptions and chaos.

This is the reason we search for patterns from the past and see if a similar situation arises into the future. Add this to our compulsion for an action pulls up a scenario that's a perfect recipe for disaster in investing. We speculate various consequences out of a scenario and find solace by building a solution that gives us a sense of control. But we don't accept the fact that we fail to predict future and the markets i.e., the collective psyche of the market participants' response to the evolving events.

It is said that a success in one's investment is depended upon their reaction to the market's response to a particular news or event. So, as we acknowledge our inability to estimate how the market reacts to a particular event or news, the only better way to tide over that situation is by having a control on how we react to the market's reaction. This is the reason why one should create a portfolio which allows us to diversify the risk while simultaneously enhance the return prospects.

History is replete with instances of some of the knee-jerk reactions by the market to various situations like that of Brexit, Taper tantrum, etc. where investors deduced mental models anticipated didn't turn out but soon normalcy regained and the market continued its growth. It doesn't mean that one has to ignore any such market perspectives altogether but one has to employ a higher risk tolerance to absorb such short-term shocks to make gains in the longer run.

These are also the times where one could ponder about the allocation size across each of the avenues. This allows one to ignore the event risks that usually have a minimal impact in the long run with shorter term volatility. If one finds the portfolio is too sensitive to such events, it's time to relook at the allocations. As mentioned earlier, to remain protected from such shocks one must filter the 'noise' that's usually accompanied in the information overload. One should also acknowledge to the fact that volatility is a feature of equities and not an exception. This allows the investor to have a better expectation out of an equity investment. The biggest immunity is achieved through diversification and right allocation than concentrating too much on the macros and their changes. This provides for a better investing journey and experience.

(The author is a co-founder of Wealocity, a wealth management firm and could be reached at [email protected])