Investors can achieve greater stability and success by aligning stimuli with financial goals

When you neither have surplus money nor an immediate need for funds, the best response is to stay invested. This scenario emphasizes the importance of patience and long-term planning

Protsaahan Aur Pratikriya Kaa Prabandhan Bas Hai Nivesh Ki Neeti;

Apni Vittiya Sthiti Ho Protsaahan, Pratikriyaa Ho Apni Ran-Neeti-Shivam

Translation: The essence of investment lies in managing stimuli and response;

Let your financial position be the trigger, and your strategy the course.

In the realm of finance, the ability to manage stimuli and responses effectively is crucial for successful investing. The couplet emphasizes that one's financial position should dictate investment decisions rather than external market movements or other external factors. This approach ensures that investments are aligned with personal financial goals and risk tolerance, leading to more stable and predictable outcomes.

Stimuli in the context of investment refer to the triggers or conditions that prompt an investor to take action. These can be internal, such as personal financial goals, or external, like market trends. Responses are the actions taken in reaction to these stimuli, such as buying, selling or holding investments.

The couplet suggests that the best investment strategy is one where the stimuli (triggers for action) come from one's own financial position, and the responses (actions taken) are part of a well-thought-out strategy.

Broadly, there can be following three scenarios with different stimuli and suggested corresponding responses.

Scenario 1: Stimulus Response

Surplus money - Invest/buy

When you have surplus money, it acts as a stimulus to invest. This surplus could come from various sources such as a bonus, inheritance or savings. The response to this stimulus should be to invest the money wisely.

Here are some steps to consider-

1. Assess your financial goals: Determine what you want to achieve with your investments. Are you saving for retirement, a child's education or go in for a major purchase?

2. Diversify your portfolio: Spread your investments across different asset classes to reduce risk. This could include stocks, bonds, real estate, and mutual funds.

3. Consider risk tolerance: Understand your risk appetite and invest accordingly. Higher risk can lead to higher returns, but then it also increases the potential for loss.

Scenario 2: Stimulus Response

Need money Redeem/sell

When you need money, it acts as a stimulus to redeem or sell your investments. This need could arise from unexpected expenses, loss of income or planned expenditures. The response should be to liquidate investments in a strategic manner:

1. Prioritize liquid assets: Sell investments that are easily convertible to cash without significant loss. This could include savings accounts, money market funds, or short-term bonds.

2. Minimize penalties: Be knowledgeable about possible penalties or fees associated with early withdrawal from certain investments.

3. Maintain balance: Ensure that you do not deplete your investment portfolio entirely. Keep a balance to continue benefiting from market growth.

Scenario 3: Stimulus Response

Neither surplus nor needed Stay invested/hold

When you neither have surplus money nor an immediate need for funds, the best response is to stay invested. This scenario emphasizes the importance of patience and long-term planning:

1. Regular monitoring: Keep an eye on your investments and market conditions, but avoid making impulsive decisions based on market fluctuations.

2. Rebalance periodically: Adjust your portfolio periodically to maintain your desired asset allocation. This helps in managing risk and optimizing returns.

The essence of the couplet lies in the wisdom of letting your financial position guide your investment decisions.

By aligning stimuli and responses with personal financial goals and strategies, investors can achieve greater stability and success. This approach minimizes the influence of external market volatility and focuses on individual financial health, leading to more sustainable and rewarding investment outcomes.

(The writer is Executive Vice-president, SBI Funds Management Limited; Translation and content by Aditya Gangal, senior Vice-president and Zonal head, SBI Funds Management Limited, Mumbai)