Avoid the Bad Choices for Investment
Having No Financial PlanFigures have shown that more than 70% of investors enter into investments without a financial plan. This means that you have no clear understanding of what you are getting yourself into. The danger that this poses is that you will not cultivate the necessary financial discipline that is required. Financial discipline is essential to any form of investment as it helps investors to make choices that are a reflection of their desired investment outcomes. Thus, in determining a viable financial plan, the following factors ought to be considered:
- Tolerance to risk
- Rate of spending
- Time horizons
- Cash flows
Following the CrowdIt is often said that the greatest man is the one who stands alone. There is a lot of truth in this statement especially with regard to investing. Many investors often look at the popular opinion and popular action while investing. If everyone is focused on acquiring the shares of Microsoft or even Apple, you might be swayed in that direction even though you have no direct interest in such companies. Well, what you should have in mind is that not all people share the same investment ideals. Your counterpart may have be high-risk taker while you are not. Moreover, not all people are at the same point in life. You might be approaching retirement while your counterpart has a long way to retirement. Thus, their investment habits may be a reflection of their individual circumstances. The point here is to always be wary of following the crowd. You might not know the underlying reason for other people’s investment choices. Hence, always subject the popular opinion to a critical analysis before accepting it. Stand on your own investment ideals.
Investor ParalysisThis term broadly denotes a state of inactivity by investors due to bearish intentions. Thus, an investor would leave his/her cash idle for a pretty long time often under the advice of a financial adviser or on their own volition. Such a decision is made as a result of pessimistic views of certain markets. The investor believes that the market is plummeting and hence attempts to profit from this decline through short selling. To remedy this, there are two options available as set in the Save More Tomorrow Program (SMART)
- Overcoming procrastination. This strategy entails pre-commitment whereby investors pre-commit their entry into the market in the future at a certain specified time chosen by the investor. This strategy has the aim of helping investors with regard to putting off actions that should be done at present to a later date.
- Overcoming loss aversion. This strategy entails periodic injection of cash to a certain investment as opposed to pouring all your cash at an instance. It has the goal of helping investors to overcome the fear of seeing the decline in value of a specific portfolio.
Being a Trader VS Being an InvestorAt the onset of this article, I mentioned the aspect of instant gratification as a common characteristic of most investors. Well, trading is mostly associated with instant gratification. Investing, on the other hand, entails wealth creation over a lifetime. Hence, most investors make choices that reflect trading habits rather than investment habits. Thus, to overcome this, you should know that investment does not necessarily guarantee immediate returns. It is a long term venture and thus you should not employ trading habits such as quick buying and quick selling with investments.
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