Take control of your emotions! Your behaviour is the wildcard when it comes to making money from investing.
You’ve set some goals and made space in your budget for investing, you’ve done your research and picked an investment manager who you can trust and a product that meets your needs, you’ve set up a debit order and now you are wondering what you should do to make sure you make money from your investments.
The returns you get as an investor depend on:
- How much and when you invest
- How long you remain invested
- When you withdraw your investment
Key to successful investing is staying invested for long enough to reap the benefits of your investment manager’s expertise.
Your well-planned investment strategy and thorough research should help you remain focused on your long-term objectives, meaning you should be less likely to react to short-term market movements, giving your investment time to grow. However, many investors with very well thought-out investment strategies forget to consider the universal human blind spot – emotion.
Emotion plays a key role in decision making
Once you have chosen an investment, your ability to make the most of it depends on whether you are able to remain committed for long enough to benefit from the potential returns, ride out the inevitable short-term ups and downs and allow the power of compound interest to increase the value of your money.
These steps may sound simple enough, but the gap between unit trust returns and individual investor returns shows that most of us find it difficult to put them into action. It is tempting for confident investors to sell out of one unit trust and buy another – an activity known as ‘switching’ – in the belief that they can ‘time’ performance and generate better returns than staying in their current unit trust. While there are undoubtedly examples of this, they are few and far between, and experience has shown that ‘timing’ performance is extraordinarily difficult to do.
The degree to which your investing behaviour is aligned with your investment manager’s long-term philosophy will define how big or how small the gap is between the unit trust’s returns and your own returns. Research has shown that, on average, investors make poor decisions about when to buy and sell unit trusts. We tend to buy investments that are doing well and sell them when they are doing badly – which makes no sense. We do this because we make investment decisions based on how we feel instead of what we know. At the end of the day, for most of us the old cliché is true: time in the market is an easier way to win than timing the market.
The point is to recognise that, on average, investors tend to be very bad at timing the market. It makes far more sense to base investment decisions on what you need to reach your goals, and then stick with the plan even if you want to run when you sense you may get hurt.
An independent financial adviser can assist you in formulating an investment strategy and help you to remain disciplined when your emotions are encouraging you to do otherwise.
This does not mean you should completely ignore your investments
Assessing your investments once a year is a good rule of thumb. While even a year is too short a time period to assess a medium to long-term investment, an annual review gives you a good picture of how your investments are performing and allows you to revisit your choices as you go along.
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