If you invest in a fund, will you make, over time, the same return as the fund does, a better return, or a worse return? Usually it’s a worse return. Illogical, until we bring in the human factor. If you want a tip – the number 1 guaranteed risk free return – later!
Behaviour not skill
Do you gamble? You know that gambling is a mug’s game. Gamblers study the form – The Racing Post, they listen to pundits, and then they place a bet and watch for the result. It’s fun! Costly fun, but still fun. Its predicated on the search for knowledge and then the need to take some action. Something gets you excited and you do something.
Do you look at share prices? Do you look at share tips? And do you get excited and do something?
Black Monday. Monday 19 October 1987, stock markets around the world crashed. More than 20% was wiped off share prices worldwide. Clients of ours had only a few weeks earlier invested in a range of unit trusts, after long and careful consideration of trading history, likely prospects etc. They lost over £30000 overnight. They panicked and sold, whereas laziness (inaction) would have saved all their losses, as six months later their funds were trading back at pre-crash levels.
This is only one example of crashes and panics around the world. There were 10 documented in the 19th century, 15 in the 20th, and so far 11 this century, the last being caused by the EU Referendum result. Some were caused by automated trading systems (but programmed by people), and some were caused by old fashioned investor panic. All can be traced back to sentiment.
How can you stop yourself being affected by sentiment?
What does money mean to you?
You need to ask yourself some fundamental questions before you can assess what you need to do and how you might go about it.
Ask yourself what personal objectives you are seeking to achieve in growing your wealth. Money is not an end in itself – its what it allows you to do. What do you want it for?
You need to consider time frames, what lifestyle you want for you and yours, what a secure retirement looks like, and how these objectives might change over time. These are just examples – we have a full planning system to pick these out to make it meaningful for you (and we don’t give investment advice).
Then, and only then, its time to ask yourself how you function, and make sure you catch yourself before you do anything that is so much “fun” it costs you.
Ask yourself 3 questions before you make any change:
If this goes well, what impact will it have?
If it goes badly, what impact will it have?
Have I been wrong before (be honest!)
This is about risk modelling
Will the change have a big impact but small risk? (maybe do it)
Will it have big impact, big risk? (mitigate it – not all eggs in one basket)
Will it have small impact, but big risk? (don’t even think about it)
Then do I have to take this risk? Usually you don’t have to. You want to – the fun aspect.
If I take this risk, can I eliminate the risk?
If I can’t eliminate the risk, can I mitigate it? That is what a bookie does when laying off a large bet to other bookies.
Remember, risk is a function of probability and impact. High impact? Why do it?
Considerations like this allows you to diversify a portfolio, balance risk and rewards and ultimately, if you leave well alone, build wealth.
This applies just as well to major business issues as well as buying and selling shares. Make a decision, don’t over think, don’t get excited and feel you have to act. Exercise self-control and self-confidence. Be “ignorant and lazy”. Then you will at least match the market, not lag it.
Want a Guaranteed return, 100% risk free?
People don’t do it (because it’s boring and obvious)
PAY DOWN DEBT!