The irony of our behaviour as investors is that investing should help us prosper yet our actions leads to the opposite. We suffer because what we believe, what we say and what we do are out of sync. There is a big gap. Let me show you how.
Here are some examples.
First the most cliched one.
To make money from stocks, we should buy low and sell high. What do we do? Haha!
We fully understand that growth with equity investing takes time (5, 7 or 10 years) and yet we get jittery if it fails to deliver in 1, 2 or 3 years.
Next, we invest in equities for high returns but without the volatility. We want consistency of delivery like an FD.
We come in for the long term but we want to book profits as soon as a stock or a fund value goes up by 20, 30 or 50%.
We know asset allocation accounts for more than 90% of the portfolio returns and yet the only thing we are interested in is “the best fund”.
We know that following best performing past funds/stocks recommendations may not be the right way to invest and yet we make those articles/videos the biggest hits, so much so that they keep coming back – edition after edition.
Heck, if you are Elon Musk, why not cryptocoins – BitCoin, Ethereum, DogeCoin?
We know that over diversification is not good for better returns (alpha). That 2 or 3 mutual funds or a dozen stocks are enough to achieve the required diversification too, yet we love to have 10, 20 or 30 funds. Let’s not even count the stocks.
We know that to win we need to focus our efforts and resources and yet we run in all directions, trying to catch the next big thing.
We value convenience in investing (one click transactions on the mobile) more than the right thing to do.
We know a plan can help us get the right direction, discover the chinks in the armour and define a meaningful strategy, yet we just continue to make random transactions. (Think software, house or a car.)
We know an advisor (tax, investments, planning) can bring in required expertise, handhold us and develop perspectives to help us make right decisions, yet we avoid engaging one.
Finally, we know that prevention is better than cure. We get rich by not making big mistakes, yet we start to think about money and investments only when we are hit by a boulder (think LIC, that real estate or Yes Bank).
Carl Richards, a financial planner and an author, has identified such and more behaviour issues and famously termed them as the Behaviour gap. It is a series of illustrations available on his site as well as in a book format. If you are serious about becoming a good investor, it is a recommended read.
Yet another thing you can rely on to make your investing behaviour better is the Investing 101 – an email series about some of the most important things in investing.
Do you notice any irony in your investing behaviour? If you have overcome it, do share for all of our benefit, how.
(This post was originally published 3 years ago. Things are pretty much the same.)
If you were looking for a direct stocks portfolio which can enable you to compound your wealth, I suggest Amey’s Wealth Compounder Direct Stocks Portfolio on the smallcase platform. Read more about it here.