Manage expectations and beliefs

2013 winds to a close and it is time to set expectations for 2014. Investors expected little from equities in 2013 and they clearly got more than they expected. Expectations for 2014 seem to be qualified by the election factor. A win for BJP would see a reset of expectations to a higher plane. A mixed verdict would see a sharp drop in investor expectations. While investors know how to set their expectations, they seem to be lagging in developing investment beliefs. Mostly, investors confuse expectations with beliefs. That is where most investment follies begin. If you develop even a few simple beliefs – to be contrarian in buying, to invest in an economic slowdown and to have a investment horizon long enough to land you in a bull market, most investment expectations will be met. A successful investor always carries the right beliefs and lower expectations. In contrast, a failed investor carries high expectations and no beliefs. Equity investing is a believer’s game. One hopes to see the tribe of believers grow in 2014. Expectations must be set only after you know your beliefs clearly and align your investment behaviour to your core beliefs.

It’s a long and winding road from skepticism to euphoria.

Managing expectations is as important as managing money. Investors often overly focus on managing money without understanding how to set their expectations. Developing the wrong set of expectations is the most common mistake investors commit. Setting benchmarks which are unrealistic leads to disappointment. Yet, investors are mostly unrealistic when they set their return expectations from equity investments. For instance, investors never assume that their investments can go down in the short term. Often, investments remain at the same value as their purchase levels for a long time. These should not matter in the long run if the investments are fundamentally strong. A sound investment premise should back every investment decision. Investors must be ready to see their investments go down in the short run. That they lose value should not make the investor lose his faith in them. Investors must spend enough time and effort in decision making. Hurried decision making should be avoided. If decisions are made in haste then the time spent in the long investment cycles will be wasted. When decisions are well thought through, spending time with the investments will seldom fail.

Deploy money adequately in debt & equity before inflation drops.

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