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How To Improve Your Investing Through Understanding Yourself

Investing is not an emotional journey.

 

“If you know the enemy and yourself, you need not fear the result of a hundred battles.” – Sun Tzu

Most investment advice is centred around investment methods and market analysis. They strategise to beat the markets. However, not many focus on a crucial aspect of successful investing – understanding yourself.

Figure Out Your Motivations For Investing

Before embarking on any investment analysis, ask yourself a simple question: “Why am I thinking of investing?” While this may seem like a simple question, some might be surprised by their own, honest answer.

Many retail investors start because it seems like the “right thing to do”, a rite of passage similar to buying a flat, insurance and so on. Other reasons include supplementing income and wanting to provide more for their family.

The underlying assumption with the above reasons is that they expect money to be made. Yet everyone understands that stock investments are risky and you can lose your entire investment. Notice the difference between these two statements? The first is based on a biased perception, the second is based on reality.

Since investment results depend on proper analysis and risk management (ie. things that are based on reality), one needs to approach investments from that angle and adjust their expectations accordingly.

Read Also: Understanding Investors Emotions to Make Better Investment Decisions

Your Emotional Responses Can Ruin Your Investment Performance

Just because everyone else is investing does not mean you have to follow. You might have that one friend or family member that made a windfall from stocks/property/etc.

The success of a friend or family member contributes to a mindset that you can do the same thing. Certainly this is possible, but it is a flawed mindset that is again, not based on reality. Why? Largely profitable investments require a combination of extremely good timing, luck and market conditions that may not be appropriate at the present moment.

For example, a basic understanding of monetary policy would help you understand that stock markets today are in a totally different environment from the post-2008 crisis. By recognizing when you are emotionally affected, you would be able to stop yourself from rushing into investments at the wrong time. (If you’re skeptical, ask those who made long-term investments during 2006-2007, after seeing the multi-year bull market run.)

Read Also: The One Crucial Mistake Almost Every Investor Will Make

 

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