Horses, Investors and Blinders
If you have seen a horse on a race track or pulling a wagon, you will find it wearing blinders. The reason being, they have their eyes at the sides of their heads which provides them with peripheral vision, and the blinders help them to focus on the forward direction. Horses are free-spirited animal and often the rider doesn’t have much control over their movement and this is where the blinders come to the rescue.
The blinders keep the horse’s eye focused on what is ahead, rather than what is at the side or behind
You may be wondering, why I am talking about horses and blinders and what has it got to do with investors. I am using horses and blinders metaphorically to highlight the role of constraints in investing.
Blinders are in effect constraints
The word, ‘constraint’ does have a negative connotation. The definition of a constraint is something that imposes a limit or restriction or that prevents something from occurring. But when used in the right context, constraints play a critical role, as they help us define boundaries and enable us to anchor our thought process — making it better and more efficient.
If you look in the realm of investing, investors are always operating under some form of constraints. Access to capital, availability of time, legal/regulatory factors, financial acumen, sound investment advice and much more. The most critical is the time horizon, which dictates the risk appetite and capital preservation.
There is a relationship between an investor’s time horizon, liquidity needs and the ability to handle risk. Long term investors generally require less liquidity and can tolerate greater portfolio risk. The timeframe provides a cushion to absorb short term volatility, which may not be the case for short term investors. The current volatile times are a case in point, where every news can have a potential impact on the investment portfolio.
Every decline in the markets seems like the start of a big market crash and more often than not, it is a temporary decline. The below chart is of NIFTY 50 (benchmark index) for year-to-date (YTD) and for the past year (since June 2020) illustrating the movement of the index.
If you look at the YTD returns (on the left), you will see a sharp decline in Feb 2021, but when you zoom out and see the past year chart (on the right), the Feb decline looks like a small dip. What this demonstrates is that peaks and declines are an integral part of an investment journey, but eventually things get smoothened out. The need is to stay invested and not really try to time the market.
Leveraging constraints to construct blinders
We all know that it’s easier said than done especially in the times, we live in. With every investor having an investment dashboard on their mobile phones, showing real-time portfolio performance, it is really difficult to not do anything. Secondly, with the democratisation of content creation, financial advice is not just restricted to professional advisors. Instagram and similar platforms are filled with individuals providing their two cents on investing.
In this chaos, it becomes imperative to put on your blinders and stay focused. So what should be the construct of the blinders?
- Accept volatility as an inherent feature of the market
- Make investment decisions based on discussions with your trusted financial advisor
- Time is the best friend of good assets — give time to your investments for the best outcomes
- Keep yourself updated with the latest happenings in the investing world and economy at large — Critical to developing a multi-dimensional perspective
What are other things which can add to the construct of the blinders? Would love to hear your thoughts.
Until next time.
~ Sajid
Disclaimer: The intention of this article is to provide information. Nothing in this article has to be construed as advice or recommendation.
