Six rules how to manage investment uncertainties

Six rules how to manage investment uncertainties

This is an updated version of a post originally published in 2012.

Perception is realer than reality.

Also, as long as the information is frequently repeated and rotated, the perception doesn’t verify the quality of ‘expertise’ it’s been fed with and created by.

Our lives are saturated with information lava erupted daily by a financial world volcanos with the spotlight on variables beyond our control - platforms, products, investment managers, interest rates, managed funds, direct shares, ETFs, investment performance, share market, Europe, China, Bora Bora...

However, they only cause noise and a blinding perception that they should be a centre of investor attention and concentration.

People just need to know the truth.

These variables have very little to do with real life investment outcomes. People simply do not experience the investment returns published in the magazines they read. The dominant determinant of real life investment results is something we can actually control and anticipate (in some people) – investment behaviour.

Therefore, if people want to experience quantum changes in their investment outcomes they need to hire a behavioural coach. A passionate coach will ensure that they stick to their plan and follow the below rules.

Six rules how to manage uncertainties and be a successful investor:

 1. Invest in your future – have a plan and a hire a coach

Good advice is worth paying for. The important detail is to hire someone who will talk to you about you, your attitude towards investing, your experiences, your plans, your values. If the conversation starts about ‘a great investment scheme’ or ‘guaranteed high returns’, you need to run! And run fast.

2. Believe in the future – things always get better

You will never be a successful investor with a negative outlook for the future. If you are constantly worried about what can happen and you cannot sleep at night after seeing a scary business ‘news’, maybe investing is not for you.

3. Realise your time frame – invest for life

The decision to invest should be more about an educated choice and changing your attitude about money in general. Seeing money more as a value and less as a currency. Understand that the main reason people invest is to enhance the purchasing value of money. Once you make that decision (and you only have to make it once), you are in much better position when it comes to selecting a time frame for your investment. Once you are in the know here, the most likely time frame you choose is ‘the rest of your life.’

4. Diversify  – never make a killing, never get killed

This must be the most talked about investment rule and the most ignored at the same time. Spreading your money across a number of options will decrease your chances to make huge gains. Yes, unfortunate, I know. But at the same time, it will decrease your chances of your portfolio suffering huge loses, which believe it or not, would hurt much more.

5. Look for value – never chase prices, always chase value

This is a difference between an investor and a speculator. It’s all in the understanding of basic investment fundamentals:

-          Price and Value are in a negative correlation

-          Price and Risk are in a positive correlation

What does it mean?

If price of a share is going down, its value is increasing (assuming it is a quality blue chip company, with healthy balance sheet etc.) and investors know it is a better investment now. The speculators that always chase prices panic at this point. They think the value of it is reducing and they flee it.

On the other hand, if the price of a share is increasing, its value is decreasing. The investors know this, but the speculators think it is a much better investment now and they keep buying more.

What speculators never seem to know is that if the price of something is increasing the risk of it is increasing. And vice versa, if the price of something is going down, the risk of investing in it is in fact decreasing.

6. Be patient and disciplined – do not react to noise

I always say to my clients that investing is simple. But it is not easy. Mostly because people get very emotionally attached to their investments. The more attached they get, the less patient and disciplined they become.

The environment surrounding us is not helping either. We are constantly bombarded with headlines like ‘Look at the latest investment trends’ or ‘ The shares to buy in 2013’ or ‘How you should re-act to…’. This noise is making people very nervous, they often stop believing in what they’re doing and they tend to switch to something else. Of course, that new investment will become old the very next year and they switch to something else again, etc.

Investing is about something else. It is about constructing a portfolio which is perfectly in tune with your long term plan and values. Once it is put together, you don’t reconsider appropriateness of it based on the latest market performance. You buy it and you hold it. And if you can’t cope with the latest ‘end of the world news’, you call your adviser for re-assurance. 

Investing has a very little to do with products, trends or financial magazines you read. Most people would say it’s not too exciting, not too much fun. And that they can do it themselves. Well, they can’t. Not unless they have an empathising and caring coach standing by their side. Everything else is noise.

If you are looking for excitement, take $1,000 and go to Vegas.

by Michal Bodi

Email me if you want to know more – mbodi@sydneyfinancialplanning.com.au

 
 Images courtesy of pakorn & renjith krishnan / Freedigitalphotos.net