I bet it’s easier to swipe a credit card in a store, apply for a personal loan or order an item online, than taking an investment decision.
You don’t want to risk being wrong. But you are not fully aware of the risks involved, and the uncertainty translates to procrastination or seeking advice in all possible avenues.
We trust people more than a cold excel sheet analysis or complex financial statements. So, we turn to our friends and social media groups. Savvy investors read all the recommended books and bestsellers on the subject. We ask financial advisors what’s happening with their other clients. It gives us comfort to hear from someone who has walked the path before.
WHAT WE IGNORE IN THE DECISION-MAKING PROCESS
No investment advice can be a cut-copy-paste formula. The factors that aid a good investment decision are
- Financial Goals
- Stage of life
- Time Horizons
- Risk Appetite
- Risk Bearing Capacity
- Rate of Return
Related post: What is Risk Profile in Risk Management
WHAT DO WE NEED TO FOCUS ON WHILE TAKING DECISIONS?
The best authors we follow on the subject of investor mindset are from the West, where the social system is totally different.
Indian parents may support children till the age of 25 or 30. Some children may support parents in their old age. A child’s wedding is a huge financial goal in India, whereas it may not hold the same importance in the West. Student loans are a ticking time bomb for banks in the West. In India, it is a cause of worry for parents who are guarantors to the education loan or have mortgaged property to the bank.
We need to see the date of publication of the book. When Morgan Housel wrote his legendary book “The Psychology of Money”, crypto and non-fungible tokens were not so huge on the investment horizon. Hence, there is no reference to the kind and volume of risk involved in virtual digital assets.
The same holds good when friends share their investment strategies. The age at which they started, who will have their back if they fail and their financial goals may be very different from yours.
2. APPLICABILITY OF THUMB RULES
Thumb rules do give a direction to thought, and can make a good strategy for beginners.
Related post: Thumb Rules for Financial Planning
But the total corpus needs to be considered before working on a given percentage.
Going back to “The Psychology of Money”, Morgan Housel says one should be willing to bear 20% losses as a fee or cost of investment.
But 20% of what?
20% of the entire corpus may be too huge an amount to lose for many of us. Does he mean to say 20% of potential gains, 20% of assets in stock markets or 20% of something else?
Decide a percentage you are comfortable with. Ideally, one should take percentage of net worth into consideration, rather than assets or investment amount. The liabilities you carry will impact the future.
Related post: Are Net Worth statements accurate?
Financial planners advise 5% of your total net worth in crypto or virtual digital assets, given the volatile nature of assets and lack of historical performance to base decisions on. Experts opine it may turn out to be a bubble, and it scares off potential investors from putting large amounts at stake.
3. RISK APPETITE VS. RISK BEARING CAPACITY
I find the youth obsessed with high returns in the short term. Hence, a large part of crypto investors are young people.
They don’t want to be left out of the party. It is FOMO (Fear of Missing Out) in operation.
They have time on their side. Losses can always be compensated with future income. Lack of experience also makes them fearless.
But risk-bearing capacity is a different measure. Older investors cannot put their retirement plans at risk. The young may have to sacrifice future financial goals, if they suffer unforeseen losses in risky investments, or get entrapped in debt.
4. RISK MINDSET
Some of us may inherit risk aversion or risk enthusiasm. We go by the experience of our parents or seniors, till we write our own stories.
The stance we take may be identical or exactly opposite to that of our parents. It depends on the kind of childhood we’ve had.
5. DO TRIBES HELP?
A tribe can be a decision-making group, which can help final results.
Jim Rohn says you are the average of the five people closest to you. This tribe can include celebrities you follow, books you read, people you look up to for advice, online courses you take and the research you do on your own.
Do invest some effort on your own, in learning and research before taking a final investment decision. It’s not right to look for copy paste solutions, or be coached by someone who says “Do exactly as I tell you, without asking questions.” The person who gains may be the coach, not you.
The job of a coach is to ask relevant questions, hand-hold and guide you towards the best decision, not promise to carry you on a path which does not lead to your goals.