Ego and emotions are the enemies of sound investment decisions
Emotions, especially fear and greed, should never be part of making investment decisions that are meant to build your future or provide a legacy for your loved ones.
People typically experience several emotions when making investments, says John Manyike, Head of Financial Education at Old Mutual. Typically investors begin feeling confident about their investment. Later, they may fear that they have not made the correct decision and, as market conditions and interest rates improve, can find themselves feeling optimistic about their choices.
“Greed, however, is the emotion that should be avoided when thinking about investing. Greed, and a belief that a scheme should be considered for your money because it offers much higher returns, can be extremely costly and even result in total loss of investment funds.
“When someone offers returns that outshine everything in the market, it must be questioned. Too many people, invest in schemes only to find later than promises count for nothing and that money has vanished.”
The things to avoid when thinking about investing, says Manyike include:
- Believing promises and benefits offered on unsolicited investments on your smartphone or by email. The background of all offers should be examined-something, that is easy if a reputable financial institution is making an offer.
- Relying on friends or family for investment advice. Most people have views on investment, and their opinions may not be that well informed. When you need advice, seek out a professional.
- Believing that you are capable of making better investment decisions than a professional investment adviser. Self-esteem can lead to good advice being ignored, and wrong decisions being taken.
- Using instinct instead of research to decide where your money should go.
- Not understanding that different types of investment have different risk profiles. Some investments, like stock exchange shares, can rise and fall.
- Panicking and selling shares when they appear to be losing ground can be expensive. These sort of investments should be long-term in nature, and patience is usually rewarded.
“Being a good investor means making sure that you have the knowledge you need. You must be able to set savings goals and then find the products that will help you achieve your objectives. This means setting emotional investing behaviours to one side and getting advice from professionals.”
“It is also natural when thinking about your future and investing life savings to be fearful about losing money and worrying about the impact this could have on your life. Fear can also result in not making decisions and losing opportunities,” says Manyike.
The opposite of self-confidence is low self-esteem. Being an investor that doesn’t trust his or her decisions brings its own set of problems. Trying to go it alone should be avoided, and an adviser sought out. Selecting an adviser who you trust can go a long way to building confidence in the future.
“There is a delicate relationship between emotions and money. There is no doubt that some of the worst decisions are made when emotions, or the heart, rule the head and common sense and good advice are ignored.”
“Old Mutual, which has been helping people to develop financial skills for 175 years, and has as one of its objectives to provide the financial tools that people need to remain objective when they make financial decisions,” says Manyike.