Keep Calm And Invest Wisely

Foreword from ShareInvestor

This article “Keep Calm And Invest Wisely” by Goh Eng Yeow was first published in The Straits Times on 05 Apr 2015 and is reproduced in this blog in its entirety.

Know your investment personality and don’t let emotions get in the way of rational thinking

On paper, making the right investment decisions appears to be easy.

But often our emotions get in the way, and we find ourselves selling a winning stock too early or holding on to a losing stock for too long.

Even professional fund managers are prone to such foibles. The Economist news magazine noted that some British investment firms have resorted to hiring an expert who trained Britain’s cycling team to coach their fund managers on how to steer clear of performance-sapping habits and biased hunches.

So recognising the enemy that lies within us – our emotions – may well determine whether we make a success of our investments or not. But this is easier said than done

Many people continue to suffer setbacks in their investments, being wrong-footed by their behaviour, which makes them commit the same mistakes again and again.

I was reminded of this observation when I recently attended a two-day transactional analysis course conducted by a psychologist, Dr Jessica Leong, who provided a host of interesting anecdotes of how a person’s behaviour is coloured by a host of factors, such as his childhood experiences.

We saw shades of ourselves in her descriptions of people who acted on impulse and made decisions which they regretted later when they had a chance to reflect rationally.

It is a scenario I find repeated over and over again in the stock market when people make an investment with their hearts, rather than with their heads, as they chase after assets till they hit prices well beyond reason. Then when a financial calamity strikes, they find themselves losing a pile of money as they cut losses on their investments, causing share prices to be depressed to unreasonable levels.

Our emotions often override important factors in the investment decision-making process, such as rational reasoning and common sense – and this can sometimes lead to painful loss of money when the investment flops.

In recent years, a small industry has grown around learning how people’s thinking affects the way they manage their money. Known as behavioural finance, it is increasingly used by financial consultants to better understand their clients’ tolerance for investment risks.

What the experts have found is that people do adopt different attitudes towards money, depending on how they come by it.

For instance, they would view the money which they work hard to earn and save as a lot more important than the money which they may have won at the casino or in a lottery. More often than not, they tend to spend such winnings with less care.

Also, while we enjoy making money if it is done in an easy way, we really hate to lose money. In fact, our fear and loathing of losses may cause us to hold on to losing investments longer than we should.

As a result, most of us find that we are much better at buying stocks than at selling them.

Another common fallibility is our fear of investment decisions which may turn out to be wrong in hindsight. This is why most investors will tell their friends only about their winners and rarely talk about the losers which had caused them grief.

This being so, how much success we enjoy in our investments may depend on our responses to losing money. This is, in part, determined by our lifestyles. There are, for instance, people who enjoy high-risk sports such as bungee-jumping. Where investments are concerned, these are the high rollers who are not averse to taking big risks.

However, there are also people who make plans and stick to them. Such people will usually plough their money into safe and secure investments, repeating whatever investment strategies that had worked for them before.

So, as a first step to learning how to manage our money better, what we may need to do is to control our emotions and learn more about our investment personality. This will help ensure that we do not end up sinking our hard-earned money, which we can ill afford to lose, in bad investments.