in number of cars, crowds in malls or number of houses being sold.

Another outcome is the increase in retail investments, be it into stocks, mutual funds or real estate. Growth in the economy and an increase in liquidity have resulted in spectacular returns from most asset classes.

Many among those sitting on huge returns will be first-time investors. Some of them will look back at their investment decisions with pride. They will tend to believe that their great returns are the result of the reliable information they have and their superior forecasting ability. However, most will conveniently ignore the fact that they have been riding a long bull run, which won’t last forever. These experiences create what is popularly called ‘psychological biases’ and cloud our future investment decisions. Here are three pitfalls to watch for

A common bias during a bull run, it leads investors to be smug about their future investments and underestimate the risk associated with their portfolio. For instance, Vijay, tired of living in a rented house, bought a two-bedroom apartment in 2003 in Gurgaon. An own house, which has incidentally appreciated 150 per cent in value, has given Vijay and family a greater sense of belonging, and done away with the hassle of shifting houses and renegotiating lease agreements every year.

It has also made Vijay unduly bullish on real estate investments. Vijay is now booking another apartment, that too through a home loan. Floored by the experience of the past three years, Vijay is oblivious to the fact that the climb in real estate prices may not sustain. Worse, prices could fall, which may hurt Vijay even more, since he’s leveraged. Apart from nudging investors to take greater risks, overconfidence also tempts them to trade frequently, which results in high trading costs, taxes and, more often than not, bad decisions.

Often, we take investment decisions not on the basis of fundamentals, but on the outcomes of recent decisions. Rather than sticking to their asset allocation and risk profile, investors tend to pursue higher risk after making profits. The PE (price-to-earnings) ratio of a high-risk stock is often abnormally high, but the investor sitting on a profit tends to invest in such stocks without detailed analysis.

Similarly, an investor who has experienced losses in the recent past may have different behavioural biases that affect his decisions. He may try to hold on to a bad investment for too long to ‘break-even’ and may end up increasing the risk in his desire to recoup losses. Alternatively, he may show reluctance to take any risk at all and may tend to exit the stock market during a temporary downward swing, even though the stocks he is holding are fundamentally strong.

Albert Einstein once said, “only two things are infinite, the universe and human stupidity and I’m not sure about the former.” Don’t let behavioural biases cloud your investing decisions. Stick to the fundamentals, stay true to your asset allocation, stay focused on your goals and take professional advice when necessary.