Should you react or Should you respond?

react or respond

Have you heard about “The Cockroach Theory of Self Development”? The story goes as follows. At a restaurant, a cockroach suddenly flew from somewhere and sat on a lady. She started screaming out of fear. With a panic stricken face and trembling voice, she started jumping, with both her hands desperately trying to get rid of the cockroach. Her reaction was contagious, as everyone in her group also got panicky. The lady finally managed to push the cockroach away but unfortunately it landed on another lady in the group. Now, it was the turn of the other lady to continue the drama and this went on for some time in a relay. Finally, a waiter had to rush forward to their rescue by ensuring that the cockroach fell upon him next. The waiter stood firm, composed himself and observed the behaviour of the cockroach on his shirt. When he was confident enough, he grabbed it with his fingers and threw it out of the restaurant. Finally, the melodrama ended and the restaurant returned to normalcy.

As an observer, one starts wondering whether the cockroach was responsible for the histrionic behaviour of the patrons. If this was the case then why was the waiter not disturbed? He handled the situation near to perfection, without any chaos. How come his behaviour was in contrast to that of the customers in the restaurant? The answer lies in the fact that it was not the cockroach that was at fault, but the inability of the customers to handle the disturbance caused by the cockroach.

What are the lessons learnt from the story? Clearly, one should not always react in life but should necessarily respond. The customers in the restaurant reacted, whereas the waiter responded. Reactions are always instinctive whereas responses are always well thought of.

This sentiment is strongly echoed in the investment world. We generally panic and overreact to equity market gyrations, at times making a forceful exit even if it causes a loss (Remember the 2008 equity market crisis?). It is therefore important to learn from the waiter and stay calm in response. While all of us wish to create wealth in the long run and also understand that equity is one of the best asset classes to help us reach there, it is our reactive behaviour that acts as a deterrent in this journey. For example, we know of many equity mutual funds that have provided superior returns over 10, 15 and 20 year periods but very few of us have earned these returns in our portfolios. This is mainly because we did not stay invested long enough.

It is thus important to remain unperturbed and learn to stay invested by cutting out the market noise during bouts of market volatility. One of the simple ways to do this is to start investing in Systematic Investment Plans (SIPs) of mutual funds which can help us to invest regularly. Since SIPs invest across market cycles, the market volatility is spread across multiple instalments rather than at one point in time. SIP is like your “Good EMI” – an investment not an instalment. The key is to continue investing over the long term and generate wealth in the process.

 

 

Information contained in this article is not a complete representation of every material fact and is for informational purposes only. The recipient is advised to consult its adviser/ tax consultant prior to arriving at any investment decision.

Author: Franklin Templeton Mutual Fund

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