You need a behavioural coach whether you self-manage your investments or not
With the increase in emotional and physical stress that individuals are suffering from, guidance that extends beyond traditional advisery services certainly helps. In this article, we shall discuss the relevance of a behavioural coach in improving your financial well-being.
An investment adviser typically helps in creating portfolios. This includes suggesting an appropriate proportion of equity and bonds (asset allocation) and how to tax-efficiently make such investments (called asset location). In a world where choosing investment products can be confusing, an adviser aims to provide allocation alpha and tax alpha. That is, they strive to improve your portfolio returns by tax-efficiently investing an optimal proportion in equity and bonds and by selecting appropriate products within equity and bonds to suit your risk attitude.
Now, consider a parallel world where you keep your investments simple. That is, you choose one equity fund and one recurring bank deposit for each goal you pursue. You choose an index fund; for all index funds benchmarked to say, the NSE 50 Index, will generate similar returns. This reduces the regret of choosing a fund that could underperform peer funds.
As for your recurring deposit, you choose a maturity that matches with the time horizon for your life goal. What about your tax-efficient investments? Your Section 80C benefits are exhausted by investing in provident fund and public provident fund.
We previously discussed in this column some simple asset allocation strategies that you can adopt to self-manage your investments. In this parallel world, therefore, you may not require an adviser to choose investment products and help with your asset allocation.
Yet, a behavioural coach can improve your portfolio returns. Consider this scenario. It is four years since you started a portfolio to fund your child’s college education. You have 11 years before your child enters college. Based on your savings, this portfolio requires a minimum return of 8.5% over 16 years.
This year, the market is currently down 10%. Regretting your decision to invest in equity, you want to move a significant proportion to bonds (read fixed deposits), as it feels safer given the market volatility. But if you move to bonds, you reduce your portfolio’s expected post-tax returns.
What should do you? A behavioural coach should be able to help you understand that the market being down 10% does not mean your portfolio is also down a similar percentage. Your coach can also determine how you can adjust your savings going forward to achieve your goal despite such downturns. Of course, you can do the math yourself. But having a coach tell you this can be reassuring.
At other times, you may be suffering from overconfidence, especially when your investments generates handsome returns. Your coach can help moderate your investment biases.
A behavioural coach, therefore, plays an important role in personal finance because successful investing is as much about emotional discipline as it is about technical knowledge. You should have a behavioural coach whether you self-manage your investments or not. Such a coach will help you apply deliberative thinking to manage your investments. Otherwise, your emotional mind can hijack your thought process, driving you to take decisions that could hurt your financial well-being.
(The author offers training programmes for individuals for managing their personal investments)
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