Sapna called me asking if she could book profits on her investment portfolio. For the first time in three years that she had been SIPping, she had seen profits, so she wanted to take it out lest it turn into a loss again.
Sapna is not the only one who faces this kind of conundrum when she receives her portfolio valuation report. The human mind works in such a way that we would like to preserve what we value. So the absolute returns showing in the portfolio after a longish period of negativity was valuable to Sapna. She wants to preserve it.
But is that what she really wants? She had started saving small amounts from her income every month. She did not have any specific goal in mind. So for her the numbers were all there was to it. Had she clearly defined that this is the amount I will use to create a down payment for my first property or this is the amount for my dream vacation to New Zealand, she would not be confused. Every quarterly report would not make her wonder what action to take on her portfolio.
People invest for various reasons. One person might invest to curb his urge to spend it all, another might invest for the thrill of it, while someone else might want to learn investing first hand by trying it out himself! One persons valid reasons might not make sense to someone else
Eventually everyone wants to be rich. The road to becoming rich will be lined with numerous decision making points, where you will be called to judge your own investments. If you do not give a thought to why you invest, these will be very difficult times for you. At every juncture you would wonder if you have made the right decision, or should you get out of it. It can be frustrating and can lead to financial losses. Sometimes you may get very fidgety when everyone else seems to be making money, but you. You would desperately want to jump the train and get on to the other one which promises a better destination. Mutual funds are not performing, but property is giving phenomenal returns. Why don’t I just liquidate my portfolio and buy some land in Jaipur!
In conclusion, money is a means to an end, it is not end in itself. So if you are able to clearly define what you want your investments to do, you will be in a better position to act rationally at most times.