As human beings it is quite natural to react emotionally to falling investment values. Being smarter than the average investor, whilst difficult in practice, simply takes patience and the ability to remain rational.
Expensive mistakes caused by emotional responses.
If there is one thing that we can take away from the Global Financial Crisis (and all other crises ever) is that we never learn.
It is human nature to take what has happened in the recent past and project that out to the future. When this happens financially well put together, rational and sensible investment plans can be abandoned.
Fear and excitement are two common emotions people experience when investing. In many ways we are predisposed to buy high and sell low, cling to losing investments we should sell and follow the investing herd off a cliff.
This happens again and again.
How to act smarter than the average investor
1. Have a ‘better’ investment timeframe
Long term investment timeframes tend to produce better results. This is because you will generally be aligning your investment timeframe with the business plans of the companies you are investing in.
Choosing investments based on their profitability, debt levels and quality of management (fundamental analysis) combined with a long term timeframe are both key to coming up with an appropriate strategy.
Those who try and trade investments on a short term basis generally fail.
2. Don’t place too much emphasis on the indices
A large number of fund managers place great importance on the index in which they are investing.
This will provide a good spread of investments however, just because a certain company makes up a large proportion of an index doesn’t necessarily make it a good investment moving forward. It simply means it is a large company.
Whilst having an eye on the index makes some sense, at Knight we believe that when putting a portfolio together you should not rely on index weightings. We are more interested in how big a company is going to be in the future than how big it is now.
3. There is such a thing as information overload
Thanks to ever evolving technology there is an almost unlimited amount of information available to all investors and a great deal of this information conflicts. This can often cause a confusion and mistakes and doesn’t result in better decision making.
Find a relatively small but trustworthy and effective information sources to help you make your investment decisions. We keep our investment analysis processes simple and have found this a more effective way to invest.
4. Behave smarter than others
This is the most important point and, if successful, will set you apart from the average investor. – Avoid selling at or near the bottom and buying at the top.
Sounds pretty easy however this is extremely difficult in practice due to those two human emotions we mentioned earlier (fear and excitement).
Smart investors will be those doing the opposite and, to be successful at it, requires that emotions be taken out of the equation.
Knight Financial Advisors Pty Ltd is a Corporate Authorised Representative of NKH Knight Holdings Pty Ltd (AFSL 438 631) ABN 30 163 152 967. The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.