Portfolio Ideas. Let go of the ‘what if’

Picture this. You are about to create an investment portfolio to achieve your high-priority life goal. It could be for accumulating wealth for your child’s college education or buying a house. Whatever the goal, you are likely to be emotionally attached to the decision.

One such emotion is ‘what if’. What if you do not accumulate the required wealth within the required time?

In this article, we discuss why you need not be anxious about the investment-value gap, which is the difference between your actual wealth and required wealth at the end of the investment horizon for a life goal.

Affective forecasting refers to forecasting our feelings in the future. Psychologists argue that you and I are often bad at affective forecasting.

You may believe that the investment-value gap in your high-priority, goal-based portfolio may be devastating. Fortunately, you are wrong.

This negative event may not impact your life as much as you think it would. Why? For one, you could suffer from ‘impact bias’. This refers to overestimating the intensity and the durability of the impact that a future event will have on your life.

Suppose you need ₹1 crore to send your child to a foreign university in four years.

What if you are able to accumulate only ₹80 lakh? Today, you may believe that the shortfall of ₹20 lakh, if it were to happen, could adversely affect your happiness four years hence. But the reality could be different. Your child may get her visa processed quickly.

Or she may get an admission to a better university. This positive development could dampen the intensity of the negative impact resulting from the investment-value gap in your child’s education portfolio. Another reason for faulty affective forecasting is to do with what psychologists call ‘immune neglect’. You are unaware of your ability to cope with the negative events that may happen in the future. Remember, you are non-consciously motivated to interpret negative events in a way that will minimise their impact.

Moderating affect

You should not focus on the ‘what if’ issue. Instead, your focus should be on saving and investing to achieve your goal.

You could outsource the implementation step of your investment process to overcome the procrastination arising from the ‘what if’ issue.

For instance, you may decide that a recurring bank deposit and an SIP on an equity index may suffice for your child’s education fund.

You should have your spouse or your parent implement your decision. Once the SIP is in place, the automatic debit to your bank account will enable you to distance yourself from the investment decision.

This reduces anxiety arising out of faulty affective forecasting. You should also have your family help you set up an additional SIP every year in anticipation of your salary hike. That way, you can increase your savings in line with the increase in your income, and reduce the possibility of an investment-value gap.

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

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