In continuation to my last article on Bubbles and its impact on long term investing, few more thoughts on the current adrenalin rush of Sensex (stock market) reaching new heights every day.
Let me narrate a small story before we understand about the risk involved in euphoria phase.
There were two boys who had gone to a park to play and both of them find a swing there. One boy very happily rushes towards it imagining the thrill of swing and all the fun & happiness he experienced in the past, while the other boy feels it is definitely a bad one to try since he imagines his past experiences which were not so pleasant.
In this case, being on the swing has both positive and negative effects. There is probability of fall and having a bad experience and there is also a probability of having fun. Here in this example the boy with past positive experience, under estimates risk and over estimates benefits and takes decision while the other kid, over estimates risk and under estimates benefits and takes decision not to go with it.
Are both these kids right or wrong in taking this decision? Actually, there is no right or wrong in this decision. It is human psychology to perceive and make decisions based on their past experiences. If we have a positive experience, we tend to ignore the risk and go for the decision and it is also true vice versa.
This psychology is what drives people in taking their investment decisions also.
In recent times, you must have been reading or watching each passing day there is renewed enthusiasm of people getting into equity markets directly or via Mutual funds. Sensex reaching 35,000 and scaling up with every passing day, for some of us it is giving a jittery and scary thoughts and for some of us an adrenalin rush to jump into it.
There are lots of questions in mind like, Is this too expensive market or will there be a correction. Should I invest now or wait for some time etc. For few of us , there is a feeling of just being there and participating in it.
Are both these decisions right or wrong? Again, whether these decisions are right or wrong only time will tell, but for a person like you and me, these events / new landmarks should not impact as irrespective of market conditions, our needs /goals and its deadlines are not going to change.
My thoughts on this are, irrespective of where the sensex is going today or tomorrow or next month, once you are clear of what your future financial goals are and time in hand to reach these goals are, the only mantra to reach these goals is through asset allocation.
Safety / necessity / emergency money has to be in safer / lesser volatile instruments such as debt funds of mutual funds. Long term Goals which are beyond 7 years have to be in equity mutual funds.
These decisions have to be taken based on logical and practical thinking and definitely not on the basis of feelings and emotions.
#Asset Allocation & Discipline is the only mantra to reach all your financial goals, everything else is a chance game.
Happy Investing!! Stay Disciplined & Focussed !!!