THE TRILOGY OF SUCCESSFUL INVESTING: PREPARATION
Investors often fear missing out or making mistakes, which are the reasons why most would follow the herd instead of having a sound financial strategy.
Dr Daniel Kahneman, a psychologist who won a Nobel Prize for Economics, said: “when faced with uncertainty, investors tend to make decisions based on their emotions and subjective experiences, not on logic or objective reality. As a result, investors can easily make the wrong decision for their individual situation1.”
Looking at the image below, it seems easy to tell that it’s best to enter the market at the bottom and sell it at a high. However, one’s emotions often do not allow that to happen. Even when investors know they shouldn’t, they follow the herd into buying (till the top of the bull market), and then selling in the deep. This has proven to be true based on historical money flow analysis.
“Sadly investing without emotion is easier said than done, especially because uncertainty rules the market and the media. Evidence suggests that most investors are emotional and maximise money flows at the wrong times. This is a surefire way to reduce potential returns1.”
The last P of this series for successful investing – Preparation, will assist investors in making the right decisions at the right time.
Most people who follow the herd are unprepared. They only start preparing when they are deep in the situation, and probably miss the boat as the market has turned up. If you are prepared, you would buy when it is cheap.
In the last crisis, the market dropped 50%, and the market still came back up because the future is bright. But the wait for the next crisis could be very long – as long as 10 years (since the last trough in Mar 2009).
The better news is that the market is like a tennis ball, when you throw it down hard, it will bounce back as hard. The market came down by 89% in 1929, and in the next 24 years the market came up by 500%2. And this is not just history – it can be your reality!
Imagine investing $200,000; and by the end of it, you could have a million dollars.
The question is: are you prepared to ride the wave up?
1.SchielTM Wealth Management, Breaking the Emotional Cycle of Investing
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