Cause and Effect is a relationship between events, a combination of action and reaction, where one is the result of others. The cause happens ‘first’ and the effect happens ‘after’ the cause. The cause is the reason for situation change - Why something happened? The effect is the resulting outcome - What happened?
Let's understand with some examples:
Effect: you open the umbrella, Cause: it is raining
Effect: I reach the office late, Cause: I wake up late
Effect: I failed in the exam, Cause: I didn't study
Effect: very high amount of credit card bill, Cause: you spent too much this month
Effect: cake got burnt, Cause: oven timer was not working
Effect: I am going to miss my flight, Cause: I in a traffic jam
Effect: my portfolio is not doing well, Cause: no portfolio diversification done
Effect: I am getting loss in investment due to correction in the market, Cause: Rebalancing not done at a regular frequency
Effect: I am not getting a high return, Cause: I have invested in debt funds
Effect: I am not able to beat the inflation, Cause: I have not invested in equity
We all know Newton's third law of motion - "for every action, there is an equal and opposite reaction”. However, in the short to medium run, the real driver of the equity market is investor psychology and not the economy. Well, many investors believe the laws of physics which are valid in the scientific world, also applicable to the stock market. Many presume that good economic news makes the stock market go up; bad economic news makes it go down. Is it true? In reality that's not always the case. Investing in the market is more of an art than mere science!
People are always thinking about what's happening to their investment portfolio (effect) instead of why it is going to cause to happen that (cause)!
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