Archive for November 4, 2010

Use Mental Accounting To Your Advantage: Amar Pandit

Publication: The Economic Times Mumbai; Date: Nov 26, 2010; Section: Personal Finance; Page: 12

RECENTLY we witnessed a Kaun Banega Crorepati (KBC) episode where the participant who had won 1 crore went for the 5-crore question. He had a lifeline and had already become a crorepati, yet decided to go for the kill. Sadly, he got the answer wrong and went home with just 3.2 lakh. It is disappointing to see a person who made 1 crore losing it the next moment because of the decision that he took. Not just this gentleman, there are many others on the show who fell prey to the phenomenon of ‘mental accounting’.

Mental accounting is nothing but the way we decide to treat money differently because of its source. Just because the money was earned in 15 minutes, the participant decided to treat it differently. I am certain they would not bet a tenth of that amount on the same question if the money had come from their paycheque or profession. Not just KBC, mental accounting is at work everyday in almost every financial decision we make. It makes us mentally segregate money into different accounts — such as savings, EMIs, eating-out money, vacation money, gift money or even gambling money.

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Steady Investments Can Beat The Market By A Mile: Amar Pandit

Publication: The Economic Times Mumbai; Date: Nov 4, 2010; Section: Personal Finance; Page: 18

GUESSING the index seems to be like an exciting pastime for most investors. They look at the index as some sacrosanct indicator to decide whether they should buy a stock. “Sensex is back to 20000 and I feel something wrong is going to happen again,” said one learned acquaintance. “The markets are overvalued and I will invest when it corrects,” said another gentleman who did not even invest when the market was at 8000, thinking it will go down to 6000.

I asked many people who have been investing since 2005, “Do you remember the index levels in the year 2005?” Almost everyone replied in the negative. In 2005, the Sensex was between 6103 and 9397. I remember in 2005 a lot of people called even 6600 as a high level. One client had even said, “Let’s wait till 5000.” But guess what: he does not even recall the 2005 level remotely. This is because people have made fantastic returns over five years and it’s no longer important whether you invested at 6500 or 7000 or at 7500.

Here is why index levels should not be a real determinant of your investing decision: » Read more..