When you make your investment decisions, are you fast, confident and intuitive or slow, analytic and rational?
Your dominant behavioural characteristic could be leading you to buy at the top of the market, and sell at the bottom, or become part of the latest investment scheme, against your better judgment. It could be damaging your investments and your plans for the future.
Here we look at some ways you can create a decision-making system for more balanced investment outcomes.
This new and growing field combines the work of cognitive psychology and neuroscience with economics.
It shows that many of us take potentially expensive shortcuts when making difficult investment decisions, switching between two different decision-making systems:
- Fast, intuitive behaviour, which can result in over-confidence.
- Slow, rational behaviour, which can sometimes make us “lazy” investors.
Relying on intuition may have served us well in the wild, and in some situations in modern society too but, not surprisingly it has little use when analysing large amounts of data and making judgements about the probability of future events.
Rational and analytical thought can be sabotaged by our emotions, in-built loss aversion behaviour, or simple herd behaviour (which could explain some of the recent investment fads that have crumbled.)
Over-confidence can also sabotage our investments; people tend to think they are much better with making judgments than they really are and this can cause surprising losses when it comes to investments.
A Balanced Approach
We can beat the dangers that lurk inside us. Here are five ways to make more balanced investments decisions:
1. Diversify your Investments Rather than focusing on one area, look at investing in multi-asset classes. If you have previously dealt mainly in share markets, look at bonds and private equity. It prevents having all your eggs in one basket.
Consider Risk Vs. Investment Term The amount of risk you take should be matched to the investment term. It makes sense just before retirement to avoid risk. But Australians are living longer and we will likely have a very long retirement, so avoiding risk altogether and being too timid can be a mistake.
3. Understand Value Many people fail to understand the intrinsic value of an asset, such as a house. When we invest we should focus on value, not cost. A relatively cheap property could become an expensive mistake if it doesn’t generate good rental, so the money would be better used elsewhere.
4. Stick to an Investment Plan An investment plan requires a vision of where you want to end up – usually in a wealthy retirement. What lifestyle do you want long-term and how will your investments help you get there? Long-term vision is the key to surviving short-term dips.
5. Find an Experienced Financial Planner Professional financial planners have experience and proven investment strategies that have worked time and time again. They help you make informed and well-considered decisions, taking emotion out of the equation.
These five steps alone can help get you on course for a more mature, balanced approach to managing your wealth, making the ups and downs you have experienced before a thing of the past. For more information contact Mike Sikar on 02 9929 3343 [email protected]