Understand these 3 Investing Secrets before You Invest your first $1…
Before you actually begin investing your hard earned money and look at putting your money into businesses and assets, you really need to understand a few things about yourself!
If there is one thing that I have learned from my Financial Planning Degree so far, it is that your emotions get in the way of making sound investing decisions for the future. Behavioural Finance is an interesting topic which delves into the deep recesses of your mind to understand the psychology of people’s spending, investing and saving decisions.
Three well known economists and psychologists laid the frame-work for what is to be known as behavioural finance today; Daniel Kahneman, Amos Tversky and Richard Thaler. All three of these academics wrote papers that has led to our understanding of how investors and even the markets, can make irrational decisions when it comes to managing their portfolio’s. (1)
I won’t delve into Behavioural Finance today, however I will delve into the three cornerstones that should be driving all your investing decisions from here on in. You need to leave emotion (mostly fear of missing out, herd behaviour, greed) at the front door and make every investing decision based on your;
Risk Tolerance
Personal Goals for investing and Time you have to put into it
Personal Values (Environmental Social and Governance)
Understanding these three core things about yourself and why you are investing will help lead your decision making process in all of your investments. Including the investments you make in yourself, such as potentially starting up a business, doing personal development etc.
Firstly, understanding Risk Tolerance is really important.
I am going to use the example of my wife and I, as we have very different risk profiles, where I am seen as very aggressive in my investing and my wife is a little bit more risk averse.
My wife does not like losing money, in fact, she would rather look out for all the savings in the supermarket and is very much of the mind that losing money, no matter the potential upside in the future, is not worth it. She would get anxious and even pull money out of the investments early if she saw a sharp decrease in value.
She would probably rather invest in assets that have a lot less volatility and have consistent income, such as bonds or term deposits.
Whereas I have already ridden waves and corrections previously, in fact, just last year, when we had a 30% decrease in the stock market, I saw the sales stickers that my wife normally sees in the supermarket and decided to buy more, my wife on the other hand would have just seen red.
Therefore, I am more prone to investing in different asset classes than my wife, I also am in what we call the accumulation phase of my life, where I am accumulating wealth. Your risk profile may change as you age, potentially as you stop earning income from a job and retire, you may need to re-assess your own risk profile.
Which comes down to understanding your Personal Goals and the Time you are willing to invest in making your investing decisions.
You truly need to understand why you are investing, I delved deeper into this in one of my Vlogs that you can check out here .
To know your personal goals and why you are investing in the first place will help you to make those key decisions of whether to BUY, SELL or HOLD your investments.
An example is you want to earn capital gains from a company and you find a really great growth company, with revenue increasing by 20% year on year for the last six years. Other than wanting to earn money from that company, what is the reason you would invest in it in the first place?
To save for your future kids education? For an early retirement? So you can see great growth over the next 10 years and then use the capital gains to help create a home deposit?
Investing with an end in mind is super important, which means you need to know your personal goals first. The other thing that goes hand in hand with your goals is understanding how much time you want to be able to put into your investments.
Do you want spend less than an hour per month on your investments? Maybe you have more time and want to spend 1-2 hours per week. Either way, you need to know your goals first and foremost, to then be able to understand how much time you will want to put in.
An example for this is, you may want to set yourself up with no financial worry or stress in the future, that is your goal. Therefore, you won’t want to be watching the markets or spending hours researching for the next up and coming company every week.
Your goals and the lifestyle you wish to live will determine the time you spend on your investments and finances, make sure you understand this along with your risk tolerance and you will know the best assets and investing products to park your money!
** If you are not too dissimilar to the example above, you may want to reach out to a Financial Planner to truly understand your risk profile and personal goals. They can guide you into the right investment vehicles and products for you and your goals!
And finally, understanding your Personal Values is just as important as Risk Tolerance and your Personal Goals.
Do you believe in Free Speech? What about equal rights? Or are you super passionate about climate change?
Would you put your money in a company and support them to grow and become bigger, if you knew they were an arms company?
You need to know where your money is going if you are going to be an investor, because the worst thing that could happen is you start investing in a company or ETF (exchange traded fund) that supports mining or arms manufacturing, but your personal values are against those particular things. Imagine learning that your money helped create guns, or fossil fuels?
These were the two things that my wife specifically said she didn’t want me to invest our money by the way. Therefore, I have only invested our money in companies that I have researched extensively that have nothing to do with mining, the creation of fossil fuels or manufacturing of weapons.
Now, you may have a difference in values and don’t care if you invest in those things or not, however it is best to know what your values are and do your research, or hire an advisor to help you to do so.
So, those are the three secrets you need to understand and know before you start investing, so this and you will be leagues above the average investor, I can assure you!
Until next time,
Take Back Control
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