It is very important for investors to develop the right investment mentality. Some people will always tend to be too aggressive and take unnecessary chances. They have no patience and try to get rich quickly. We could say that this group of investors eat their porridge while it is too hot and get burned. Then we get the investors who never invest because they see a crash around every corner. This type of investor will always remain a spectator and will eventually have to eat their porridge cold, chilled by inflation. Lastly we get the porridge-just-right investor. This investor understands that investing is a battlefield where losing a battle is not important, as long as you win the war.
To win the war in the investment world you have to develop the right strategy and temperament. There are a few things you have to get right and here are three of them:
- Patience: You have to understand that investing is something you do over a lifetime. If you start investing early in life, you don’t have to be clever or lucky. Investing small amounts in a broad range of international companies will be enough to get you where you want to be, owing to the forces of time and compounding returns.
- Manage your fear and greed impulse: The later in life you start investing, the more you will have to rely on skill and luck to get you where you have to be. You will feel the urgency to share in the good times and avoid the bad times and that will increase your chances of emotional investing, with the potential of making big mistakes. For most investors, managing their emotions is the most difficult part of investing and that is where a professional money manager can save you from yourself.
- Match your investment to your cash flow: Understand that equities and cash are both risky, but just over different time periods. Due to the unpredictable nature of equities, they are risky to invest in over short periods of time but essential over longer periods. Due to the predictability of cash, it offers low risk over the shorter time periods but the lower returns will be eroded by costs, taxes and inflation over longer periods. If you always have enough cash available to prevent you from selling equities when equities are down, you will never have to incur a loss on your investments.
As you can see from the points above, very little skill is required. You can go a long way by just doing the basics right, without having to chop and change your portfolio over time. There is, however, one additional fundamental skill you have to learn due to the recent explosion in the availability of information. You have to learn how to cut out the noise. The media loves to make everything as dramatic as possible, resulting in impulsive behaviour that can impact your investments over the shorter term. Equities, especially, gets impacted a lot by news over the shorter term, and that is why you always have to ask yourself one basic question, “Will my equity holdings be worth more or less in seven years’ time if (whatever negative news you hear) comes to pass?” If the news will be immaterial seven years from now, you can ignore it, but if it will cause a fundamental long-term change, you have to do something.
