Get advice when it comes your investment Ideas
Investment typically involves a trade-off between risk and reward. Benjamin Franklin once said “The investor’s chief problem – even his worst enemy – is likely to be himself”.
In practice, people make judgments and decisions that are based on past events, personal beliefs, and preferences.
Sometimes these beliefs can lead people away from rational, long term thinking. Financial planners and investors alike should learn that successful investing comes from reigning in emotions and overcoming their biases.
When it comes to investment what affects your risk tolerance?
- Your time horizon and liquidity needs is one such factor, such as how long will it be before you will need to withdraw 20% of your investment?
- Your net worth – this boils down to what you own minus what you owe. Are you including your retirement savings? The higher your net worth the more capacity you have to stand a market decline
- Investment knowledge and experience are a factor. The more knowledge you have about investing the higher your risk capacity will be as you should understand the importance of investing for the longer term. Market timing is an impossible strategy, unless you are Warren Buffett, and even he recommends staying the distance, even in times of perceived financial stresses.
- Income and savings, will determine the rate of return on your investments that is needed to maintain your current standard of living in your lifetime. Try estimating your annual living expenses and divide them by your available savings, investments and retirement funds. What percentage do you get?
- Attitude towards risk. Risk is defined as the possibility of loss or the uncertainty of an expected return. Higher expected returns require higher uncertainty of those returns. What is the worst twelve month percentage loss you would tolerate for your long term investments, before you would be inclined to sell or switch your investment?
Why have diversified investments?
Diversification is an investment technique that involves building a portfolio of funds that include exposure across different asset classes. History has shown that there is no way of predicting what asset class will be the star performer each year, or even within each asset class what sector will out perform. This is why diversification is key.
Investments; A long term strategy is best
Establishing financial goals and staying the course during market highs and lows can help you achieve your investment goals. We would all like to sell when the market has peaked, just before the market moves downward and then get back into the market at the bottom. The trouble is historic investment performance and investors experience of investment performance may not always be aligned due to investor emotions and biases. Is that a tongue twister?
Although investors cannot avoid all biases, they can reduce their effects. This requires understanding one’s behavioural biases, resisting the tendency to engage in such habits, and developing and following objective investment strategies and trading rules.
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