Investment Decision Paralysis
Decision paralysis plays an important role in financial matters especially when you are dealing in the stock markets . The volatility of the stock markets also adds to the distorted human behavior . Most people would do nothing, or as we call it , maintain the status quo . Here are some examples of decision paralysis at work .
Decision paralysis in case of market boom
- During IT boom stocks reached new heights . This went on for over a year . Those who invested in tech stocks became wealthy . A number of fund managers and clients , thought that markets were irrational and the tech stocks were so highly priced . However , everybody wanted to ride the wave , confident that they would sell when markets were softened . Fund managers of leading mutual funds were having nearly 80% of their weightage in technology sector . When markets dropped it didn’t go down in one go . It was gradual before the steep fall came . Actually the fund managers should have sold when the market began to weaken . They had been looking forward to such situation , yet when the time came for them to sell they did not sell. They suffered decision paralysis and so did millions of others investor who lost their fortunes in the tech bust . It was greed that got them to that position .
In case of Union Trust Of India(UTI)
- We all remember the story of Unit Trust of India (UTI) , the guardian to millions of Indian investor , Corporates , pensioners , widows , working class , etc. Established in 1964 it was the only Indian mutual fund where Indians invested their savings . It consistently distributed dividends and the government supposedly guaranteed repayment .One could enter or exit at any time at the prices made available by UTI itself . Liberalisation in 1991 and entry of private and public sector mutual funds soon challenged UTI’s supremacy . Despite operating in a competitive environment it continued to follow earlier policies . In 1995 stock markets boomed . That was the time to make it open-ended and let investor enter and exit at the current NAV . Times were changing and UTI’s position was threatened. The writing was on the wall but no action was taken . The Deepak Parekh committee was appointed to advise restructuring of UTI but nothing was done . Until one day inevitable happened .This not only shattered the investors of UTI but also shook the stock markets and it took over a couple of years for stock market to recover .
- Another example of decision paralysis is when investors buy top performing funds and do not reshuffle their portfolios . They are happy since their funds doing well . But when there is a choice of funds it is important to choose the right one, which may not necessarily be the one that has performed well . On the contrary the chances of sustaining its performance are much lower. By definitions a mutual fund Captures the mutuality of the market , so in bull phases you should reshuffle . Don’t le decision paralysis hamper your decisions.
Gree and Fear
- Greed and fear are the part of the market flow . Excesses characterize when the bull phase where every stock is sellable . During such phase all types of companies enter the capital market to capitalize on the bull run . Money become easily available . Investors get trapped by such stocks when the bull run ends . They swear that they will get out of such stocks as soon as they can . For years they wait for the opportunity to exit but when the next rally comes and such stocks rising they do not sell . They prefer to maintain the status quo as they get greedy , hoping to make more money on such junk stocks .