Don’t burn the good money for bad money!

It’s time to make the right money choices!

As a third person’s perspective we always think about being rational, we always say “be practical”, we feel we are able to empathize. Thinking changes, rationality burns out as soon as tables turn! When a certain incident happens to us personally we become irrational, especially when it is about finance.

I have come across 3 major points where the chances of slipping are more prominent; let me take you through it!

Direct Equity: You could resonate with it more clearly if you are into buying and selling of equities, in other words, this might have happen with most of the traders in equity.

For example:
A trader bought XYZ Ltd 10 shares at Rs.100, after a couple of months the share price is trading at Rs.80, the trader thinks to average it out and buy 10 more shares for Rs.80. His average purchase cost comes to Rs.90. supposing the current share price is trading at 60, my question is should he put more money to cover his original cost?

Here comes the choice of whether to burn the good money for bad money! People often tend to ignore or don’t think rationally whether the stock is genuinely worth the price or they just want to feel better by averaging it out! It also happens people get emotionally attached to the things they buy.

For instance: Mr.A bought XYZ Ltd stocks at Rs.100 and due to some reasons stock price starts showing a fall after a good jump over the period of time. Let’s say the current stock price is Rs.80. Ideally, Mr. A has a choice to sell it at Rs.80 or hold it (irrational behaviour). Because Mr.A got emotionally attached to the decision of buying the stock and expected it to rise over a period time, he decided to hold on to it despite of the stock price falling down further to Rs.60.

It would have been a better choice if Mr.A would have moved out with a loss of Rs.20 and invested the remaining amount elsewhere.

Business: We have also seen businessmen who are very passionate about their ideas tend to continue the business for a very long period despite of making loss.

For Instance: Mr.X started up a business in year 2012, he had done his research and analysis on market thoroughly still in year 2016 he is making loss but he plans to invest some more amount by taking loan or mortgage! Here comes the choice whether to burn the good money for bad money!

Instead of continuing the business and spending more cash, here one should think rationally. Whether it is really worth the effort and money spent, it is just a matter of silly ego petting or it’s time to work out something else!

Assets: People get emotionally attached to the assets they own.

For example: A car which puts up its maintenance cost higher than the usage. However, being an owner, my irrational behavior says, I can afford monthly maintenance cost rather than buying a new car. But if the person could have thought rationally, they would have found EMI for a new car would have been a better option than monthly high maintenance cost.

The intention of explaining these above instances are that one should be able to answer, “If he/she had not owned any of the above things, would they still averaged it out, hold on to it or make better choices?”

Think on this and for everything else Money Anna is always around!