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Whether to view volatility as an “Opportunity” or a “Crisis” depends on each investor's mindset. As we enter 2025,  the “bull” and “bear” see-saw in Indian Equity Market continue. let’s explore how to avoid the common mistakes many retail Investors tend to make in this volatile Market

**Current State of Play in Indian Equity Market**

In the last quarter of 2024, the Indian stock market put the average investor to the test. The Sensex index oscillated, climbing above the 85,000 level by the end of September, then touching 77,000 in November. By December, while it rose again, it also experienced a slight dip at the year’s end. Market volatility was heightened against the backdrop of the elections in America, the Israel-Iran conflict, and the election results in Maharashtra.

Looking at the current scene in first week of January 2025, it appears that investors need to embrace the volatility

In this article, I would like to emphasize on Five easy to understand principles that can help every investor strengthen their portfolio through appropriate mindset change for long-term investments.

**What specific changes an Investor look at ?**

Our “Financial Habits” are, in essence, the correct measures of “Investment.” For most investors, returns are determined more by their ‘Behavioural Finance’ habits than by their skills, which include financial discipline, patience, and emotional control. Successful investors like Warren Buffet, Charlie Munger, and Peter Lynch attribute their success not just to their intellectual abilities but largely to their discipline and emotional control. Hence, inculcating the right financial habits to yield long-term returns is crucial, representing the true measure of investment.

So, let’s begin 2025 with the simple 5 principles of good habits and financial discipline.

**First Principle: Identify Your Investment “Behavioural Finance” Pattern**

Financial advisor and behavioural finance researcher Michael Pompian has categorized investor psychology into four types:

1. **Preserver**: This investor focuses more on financial security and wealth preservation than on taking risks to grow wealth.

2. **Follower**: Investors in this category lack original ideas about investments and tend to mimic the trends followed by friends and other investors.

3. **Independent**: Independent investors have original thoughts on investments and enjoy engaging in the investment process; they study financial markets and can hold unconventional views on investing.

4. **Accumulator**: These investors are interested in wealth accumulation, often having found success in various businesses, and they believe they can be successful investors.

By understanding which type you fall into, you can identify patterns in your investment decisions and work with your financial advisor to address any flaws. Along with these patterns, if investors also adopt behavioural finance practices, it can certainly enhance long-term returns.

**Second Principle: Determine How Returns are Generated - Skill or Just Luck?**

Adopting a habit of evaluating these aspects in behavioural finance can help avoid many investment errors. In a "bull" market, rising prices of shares can lead investors to perceive profit and tie this success to their knowledge and skills. It is essential to discern whether the profit is due to skill or luck, especially in today’s volatile market where significant price fluctuations are common. You should confirm whether the shares you are investing in are fundamentally sound.

It’s important to analyse whether the returns generated by the mutual fund manager you’ve chosen come from skill or luck. While it may seem easy to invest based solely on past returns, selecting a fund manager based on their skill is not as straightforward. However, if you analyse the investment styles of multiple fund managers, that’s achievable. Having your investments managed by a skilled fund manager simplifies your task significantly. If you find it challenging to study these aspects, definitely discuss them with your financial advisor.

**Third Principle: The Strategy of "Winning by Losing Less"**

Embracing this thought process from behavioural finance can strengthen your investments. Every investment involves some level of risk. Just because a short-term return seems good doesn't mean it will continue long-term. In a "bull" market, you may find shares where the company’s fundamentals aren’t solid yet still yield high returns, but these shares might plummet during a “bear” market.

If your strategy is to invest solely based on immediate returns, it’s flawed. More important is to consider whether your investment will pose risks in the future. In a "bull" market, it would be more beneficial to invest with a focus on reducing risks rather than simply chasing returns, as this could lead to "short-term gains, but long-term pain."

To put it in cricket terms, in this “bull” market, it’s critical to decide whether to play like Rishabh Pant, who may hit sixes off a few deliveries but can get out quickly, or like Rahul Dravid, who may play cautiously but builds a solid foundation for the team.

In summary, the “Winning by Losing Less” strategy is about ensuring your investments mirror Rahul Dravid’s style to build a solid portfolio.

**Fourth Principle: Avoid Repeating Past Mistakes**

Recognizing your recurring errors and consciously striving to avoid them in the new year can simplify your investment journey significantly.

What mistakes should you avoid in a volatile market?

1. **Over-concentration**: Investing in just one type of stock or mutual fund.

2. **Over-Diversification**: Investing in too many stocks or mutual funds. It’s prudent to invest in fundamentally strong stocks, ideally 10-15 stocks, or focus solely on an index.

3. **Unnecessary Buying/Selling**: Unless your financial goals require selling shares or mutual funds within a one-year timeframe, avoid altering your long-term investments.

4. **Emotional Decision Making**: Avoid making impulsive investments based on emotions or following others. Particularly now, with the changes in capital tax structure affecting equity assets, you should stay vigilant against making such mistakes (investing through a regular SIP is a straightforward approach to achieving your financial goals).

5. **Getting Trapped in NFO/IPO Hype:** Many sector-specific NFOs are entering the market and are often tied to their business cycles. Regular investors might lack sufficient information regarding these investments, making it wise to avoid them. Instead, it would be better to invest in large-cap or flexi-cap mutual funds based on your risk tolerance for long-term investments.

**Fifth Principle: The Importance of Financial Discipline, Patience, and Asset Allocation**

Just as we adopt healthy eating, exercise, and sleep for well-being, the trio of financial discipline, patience, and asset allocation proves extremely effective for our long-term investments in this "bull" market. Analysis of numerous long-term investors shows that returns in investments stem more from proper asset allocation than from choosing specific stocks or mutual funds. Over 95% of returns in long-term investments can be attributed to the right asset allocation.

Here’s a table showing appropriate asset allocation for investment durations of around 35-40 years.

To illustrate the significance of discipline and patience, consider a simple experiment:

1. Ramesh follows financial discipline and invests through SIP on the 1st of every month.

2. Suresh only buys when the market is at low points, after consistent monitoring.

If Ramesh and Suresh invested 10,000 rupees monthly in Nifty from 1993 to 2023, one would expect Suresh with his strategic timing to have a substantially higher portfolio. Surprisingly, Ramesh’s portfolio value is only about 5-6% less than Suresh's.

This highlights how financial discipline and patience can lead to solid investments even by following simple rules. Thus, during both bull and bear markets, if investors can avoid the mistakes outlined above, they will undoubtedly reap the long-term benefits of sustainable investments.

In conclusion, for a deeper understanding of the right mindset required for investing and to cultivate several good investment habits, strongly recommend reading "Value Investing and Behavioural Finance" by Parag Parikh.

Ultimately, investing is an art. By inculcating these five principles linked to behavioural finance this new year and making necessary changes in your investment habits, your investments will strengthen and yield good returns in the long run. I hope all investors make conscious efforts this year to experience the profound benefits on this journey. If any challenges arise, be sure to seek help from your financial advisor!

Anand Pophale, Certified Financial Planner, Vimrash Consultancy Services 

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