HDFC MF

Weekend Bytes
A weekly series from HDFC Mutual Fund

Avoiding Instincts and

Striking a balance between
action and inaction

hdfcfund.com
Weekend Bytes | March 2024

Back when we were hunter-gatherers, a small delay in decision making

could result in us being hunter or prey. Often these decisions needed to be
made quickly or instinctively. There was no time to think through the various
options available. Our instincts have helped us humans survive over
thousands of years, helped fulfilling our basic needs like safety, food, water
and shelter. Most of these instincts are intact within us even today.

These instincts are not likely to have attuned to the past few centuries of the
modern world (which has been a short period over a reasonably long period
of evolution). We all make instinctive choices while shopping, choosing a
movie on OTT, making a chess move, etc. In most cases, you benefit from
quick decision making. There is also a bias for action. What about investing?

The world of investing, as we observe, happens to be one where

patience pays, while instinctive decision making, more often than
not, could prove detrimental. But how do we fend off habits formed
over millions of years of evolution?

You have more time than you think

Unlike many situations in life, there is no immediate

deadline to make many important investing
decisions. For instance, you wish to decide how
much equity exposure is right for you. Here, you
need to consider various aspects of your life goals
and situations, and you are likely to better off if
you move slowly towards your desired level of
equity exposure. In this situation, an instinctive
action could potentially work against you.

2/4
Weekend Bytes | March 2024

What Is a Bias for Action?

A bias for action is the inner engine that propels us forward. It’s that urge to
make decisions swiftly, take risks, and keep the wheels turning. Imagine
being stuck in a traffic jam—some of us would rather explore alternate
routes than sit still. That’s our bias for action at play.

When it comes to personal finance, with the

advent of smart apps that tell you the value of
your portfolio in an instant, our mind is constantly
made to react – and reacting is not the best way
to act. We are at our core instinct propelled to
react – to change our allocation. To invest in that
new idea. To invest in that hot theme. But we need
to ask – is it in our best interest?

What’s the downside of too many instinctive actions

Excessive trading and Associated costs and risks:

Frequent trading due to impatience can harm our portfolios due to costs
/ taxes and possibility of missing the best days.

Less Sound Decisions:

Rushed choices may lead to suboptimal investments. By reducing the
number of decisions, you improve the quality of your decisions.

Catching a Falling Knife:

Trying to time the market can backfire.

Very crowded portfolio:

while diversification is a necessity, having too many financial products in
one’s portfolio can be suboptimal for a plethora of reasons – tracking
annually, taxation, changing nominees, updating details.

3/4
Weekend Bytes | March 2024

Mitigating the Risks

A well-defined formula for wealth creation has the following three elements –
Sound Investment + Time + Patience.

Automate Your Finances:

Set up SIPs that invest continuously and invest in Funds that
match your ideal asset allocation

Written Investment Policy:

Define your strategy and stick to it.

Set Aside Money for Impulses:

Allocate a small portion for spontaneous spending.

Focus on the Future:

Keep your long-term goals in sight.

Remember, a bias for action is a powerful

trait, but like anything, it needs to be
exercised with balance. Use it wisely, and
your financial journey will be smoother
and more rewarding.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS,

READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

4/4