Becoming a better investor
AT the early part of our lives, we invest part of our income, and during retirement we spend the returns from our investments. Becoming a better investor, therefore, is a skill worth learning at an early age. Below are some things you need to become a better investor:
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Make sure to have clear goals in mind. Goals must be “Smart:” specific, measurable, attainable, realistic and time- bound. If we talk about financial goals, then there must be a certain number you expect at certain points in your life. That makes it specific and measurable. That number must be something within your current means to make it attainable and realistic while having deadlines and timelines make it time bound. After setting your “Smart” goals, the next thing to do is to have a well- defined plan to achieve them. Do have Plan A, B and C. Having alternative plans shows you anticipate scenarios that might happen and are prepared to meet them to achieve your goals.
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have goals and plans. HAVE A WELL DEfiNED STRATEGY ON EXECUTING YOUR PLANS.
Having entry, exit and rebalancing rules helps in developing a more systematic and objective approach to investing. A winning strategy must include an exit strategy, whether at a gain or loss. Your investing style and philosophy may differ, but having the right strategy that meets your skill and personality criteria is key to achieving your goals.
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KEEP GATHERING KNOWLEDGE AND EXPERIENCE THAT WILL RESULT IN WISDOM.
No one becomes a good investor overnight. The best ones are continuously learning. “I don’t know’’ is a valid answer to some investment questions you’ll have. “Let’s find out’’ is the right proactive approach. Learn from books, mentors and wise advisers. Mistakes are part of learning. Fail fast, but recover faster. The goal is not to be perfect, but to get better every day. As Benjamin Franklin said: ‘’An investment in knowledge pays the best interest.’’
– Either buy at the right price, find the right opportunity or wait for investments to increase in value takes time. A seed does not grow into a huge tree overnight. Checking your portfolio hourly wouldn’t help either. The power of compounding also becomes more powerful over time. As Paul Samuelson said: “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
– As humans, it’s normal to feel fear and greed. These emotions historically saved
BE PATIENT. BE RATIONAL.
our cavemen ancestors from being eaten by predators and allowed them to have more than enough to survive winters. But in investing, rationality should prevail. An investment may be a good buy at a certain price, but a bad one at high prices. One should be able to explain in simple terms why one is investing at a certain price over a certain period.
– Write down your financial goals and revisit them at least annually to check your progress. Focus on how to achieve your goals. You’ll be surprised at the ideas and actions you’ll make.
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Be open to new information and be willing to change your opinion when facts and reality also change. Making a mistake is one thing, but not doing anything to correct it is another.
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STAY FOCUSED. BE OPENMINDED AND flEXIBLE. BE PERSISTENT AND THRIVE ON RISK. DISCIPLINED.
The easier part is planning. Execution is also very important. How successful you become depends on how you deal with failure and mistakes. If you deal with failure well and you persist, you will have a high chance of meeting and even surpassing your goal. Success is not a straight line up. Almost every successful person has had to deal with some degree of hardship.
– According to behavioral finance studies, losses are twice as powerful psychologically than gains. So in general, we are more fearful than greedy. Understand that there will always be risk in investing. As an investor, your goal is to take advantage of any risk reward imbalance, where risk is much lower while the reward is higher, and avoid the risk of ruin where an investor loses everything. The goal is not to eliminate risk, but to manage it.
If you know and understand more about a specific company, then you can invest more. If you know less about individual companies, but still want to have an investment in equities, then you can diversify and buy the stock index instead.
There are many ways to manage risk. One fast way to reduce it is to learn as much as possible about an investment. Sometimes, the best investments are the ones you actually don’t make.
The path to becoming a better investor is a lifelong journey. It starts when we realize we need to improve and consciously take the necessary steps to be better. Always remember that continuous learning must also be paired with continuous action. In so doing, we are one step closer to becoming the better version of ourselves as investors.