Most of you would like to have an investment professional to manage your personal finances. Indeed, research shows that advisor-managed portfolios generate higher returns than self-managed ones. But what if you prefer fixed deposits and index funds for your goal-based portfolios? Then, your advisor cannot add value by choosing investment products, but can still play a crucial role by acting as your behavioural coach.

Managing behaviour

A behavioural coach is one who not only enables you to take decisions when you cannot but also stops you from taking decisions that might hurt your financial health. A behavioural coach nudges you into taking optimal investment decisions.

Consider this. You and your spouse may have contrasting opinions about how to invest your household savings. Rather than quarrel over the differences, you should seek the advice of a behavioural coach. At the extreme, you may also require a counsellor if money matters also affect your personal relationship.

Then, there is the issue of impulse actions. Will you buy more, sell or hold your investment when the market declines, say, 10 per cent? What if the market climbs up? Will you sell for the fear of losing your unrealised gains even though the investments are earmarked to meet your child’s college education 12 years hence? You require a behavioural coach to guide your investment actions, for your emotions could move with the market.

Then, there is procrastination. You may be postponing your decision to initiate investment. This could be because of your inner fear of suffering losses. A behavioural coach can nudge you into taking action.

Note that you cannot be your own behavioural coach. Why? For instance, at the time of making the investment, you may vow not to take profits sooner. But you cannot help taking profits when your portfolio carries unrealised gains. Blame your brain if you will, but controlling emotions is not easy.

Behavioural coach

Of course, hiring a behavioural coach can be challenging. Remember, you are not looking for a typical advisor who will help you choose investment products for your goal-based portfolios. Rather, you want a professional who understands your behavioural biases and will nudge into taking optimal investment decisions.

If you are unable to find one, you could have your spouse or friend act as an informal coach. This arrangement will work well only if you and your spouse/friend agree on pre-determined rules to be applied for typical scenarios.

Suppose one of your behavioural issues relates to taking profits on your goal-based portfolios. You and your spouse (or friend) should first design a rule to take profits. For instance, your rule may state that you should take profits if the actual returns are in excess of the expected pre-tax annual returns on your equity investments. Your spouse/friend’s role is to ensure that you simply implement the rule to effectively manage your goal-based portfolios.

But what if the issue pertains to the contrasting opinion that you and your spouse may have about investing your household savings? You should consult a counsellor if you are unable to find a behavioural coach. The counsellor will enable the two of you to explore whether the difference of opinion is simply a manifestation of your personal relationship or otherwise.

Such exploration may eventually lead you to design pre-determined rules to manage your investments. For instance, the rule could be that one of you should manage equity and the other bonds. Importantly, you should nudge each other into taking investment action when necessary.

The writer is founder of Navera Consulting. Send your feedback to porfolioideas@thehindu.co.in

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