AsiaLIFE

Investing in the markets or even in funds right now might well require a strong stomach and nerves of steel. After all when it comes to the world economy – and investing in general - we are constantly being bombarded with tales of doom and gloom. Nevertheless for those with a little ‘savvy’ and some serious discipline there might well be some opportunities to be had. To take advantage of these we first need to know ourselves, because when it comes to investing, we are often our own worst enemies.

Herd Mentality

Behavioural finance is the effect that human behaviour has on the economy and markets. For anyone entering the markets right now it’s worth taking note of behavioural finance because the past has thrown up some interesting facts about the way people act and react when it comes to their investments.

Those of us who were at all interested in the markets in the late 90s are probably familiar with the concept of herd behaviour. We might even have been guilty of “following the crowd” too. In the late 90s when internet and ‘tech’ stocks were all the rage, investors piled in to the world’s stock markets hoping to capitalise on the ‘hottest’ tips around. Unfortunately their herd mentality cost them dearly. Many amateur investors found that they had bought in at precisely the wrong time – when stocks were at their peak. The bubble then burst in 2000 leaving many with huge losses. Those who had followed the crowd in, paid dearly on the way out.

Herding is not confined to buying – it can also apply to selling. It often influences us to sell at the wrong time – because others are too. This is something we have to guard against right now when market sentiment is at a particular low.

Better Do Too Little Than Too Much

Overtrading is another dangerous trait that plagues investors. It is brought about by over-confidence. Some investors jump from stock to stock and fund to fund because they think that they are smarter than the market. Unfortunately, all they actually do is incur increased trading costs.

It is important to remember that when buying a stock or even a fund an investor is actually buying a share of a company or a share of a fund – a collective investment in a group of companies. With this in mind it is important to take a long term view. After all in the words of the world’s most successful investor, “our favourite holding period is forever.” When forced to trade, we often end up selling the wrong investments at the wrong time. For some reason the pain of taking a loss is more acute than the joy of accepting a gain. People take winning in their stride but are distressed by losing.

It is for this reason that investors often find it hard to sell losers – because they find it difficult to realise the loss. In the same vein investors often sell winners – because it reinforces their feeling of being right.

Buying IPOs & Hot Tips

A couple of other common mistakes are buying initial public offerings (IPOs) and following hot tips.

People tend to jump into IPOs thinking that they can only go up, not down. Although they may look attractive – because it is a chance to get in on the act with a new company ¬– historically they do not do very well. The price of the stock normally comes down six months after the IPO has been on offer.

Neither ‘the next best thing’ nor a hot tip should be trusted. The tip itself can come from almost any imaginable source – a friend, a relative, the internet – and it is almost always invariably wrong.

With all this in mind the best course of action an investor can take is to follow his (or her) own financial plan (or one that has been created by a personal financial expert).

Such a plan should take into account the investor’s objectives as well as his (or her) attitude to risk. Once such a plan is in place the investor need not worry about crowds, overtrading or losing. He (or she) can just get on with life …