Moderating investment anxiety 

Your choice of investment products is a function of your risk attitude. In an earlier column, we discussed why risk attitude is not a stable personality trait. That is, you have multiple risk personalities, and your risk attitude depends on how important a life goal is. Therefore, each goal-based portfolio that you create should contain investment products aligned with your risk attitude for that goal.

In this article, we extend the argument to show how your investment process should align with your anxiety levels, a factor that drives your risk attitude.

Are you always anxious about your investment outcome? If so, should you choose your investments to align with your anxiety levels? Or should you adopt an investment process to moderate your anxiety levels? Note that anxiety, if not moderated, can affect your physical health.

All of us have investment anxiety, especially when we approach the end of the term horizon for a life goal. But we are discussing here about individuals who are continually anxious about their investments. If you are one of those, what should you do?

To moderate anxiety, you could invest only in bonds (recurring deposits with banks) to earn interest income. But the expected return on bonds is significantly lower than the expected return on equity. For instance, after-tax return on deposits is 4% and that on equity is approximately 11%. So, avoiding equity would require higher savings in bonds to make-up for the lower returns. This means you must cut your current consumption to achieve a goal, given that it is not easy to increase income levels.

For most, cutting consumption may be difficult, given that this may require a significant change in lifestyle. So, an alternative is to adopt an investment process to moderate anxiety levels.

Active self-distancing

Active distancing refers to the process of deliberately distancing yourself from an investment decision. This involves substituting a mechanical process for a manual process. That is, you set up an automatic debit from your bank account to a chosen mutual fund (through systematic investment plan) instead of making an ‘active’ decision to manually transfer money into the fund each month. But if you are suffering from high levels of investment anxiety, you should delegate the investment decision and the related process to your spouse, sibling, or parents. This is active self-distancing.

The objective is to distance the emotional part of your brain from the investment decision (active distancing) and the investment process (active self-distancing). Note that active self-distancing is only required for investments whose source of returns is capital appreciation; for only such returns have uncertain outcome causing high levels of anxiety. You do not have to delegate your bond investments, as the source of returns on bond investments is interest income.

What about the fear of defaults on deposits, you may ask? Unless you are suffering from intolerance of uncertainty (extreme levels of anxiety), you are unlikely to be anxious about your bank deposits. Why? Equity prices are known to be volatile. So, the downside risk in equity is more salient whereas default on bank deposits is not so common.

For many, investment anxiety could be a manifestation of the current environment- health-related issues associated with the pandemic or work-related stress. So, active self-distancing may be temporary till you moderate your anxiety levels. You can then switch to active distancing to moderate biases such as regret aversion and compulsive urge to spend.

But if your immediate family cannot assist you with active self-distancing, you should hire an investment advisor to manage your investments. It is important that your advisor integrates psychology and financial therapy into the investment process. Financial therapy is meant to provide emotional support to cope with your investment anxiety; hiring an advisor to just recommend investment products is unlikely to reduce your anxiety.

(The author offers training programmes for individuals to manage their personal investments)