A Lens Over Seven Investing Tips for 2020

Another decade is approaching its end with the beginning of 2020 in just a few days. Investors were more fearful during the beginning of this decade amidst several concerns emerging from the 2008 global financial crisis (GFC). Those who restrained themselves from investing (being more cautious) missed significant opportunities (returns) delivered by the equities market over the decade.

As the year 2019 concludes a decade of strong gains in the Australian equity market, investors are likely to be curious to tap the potential benefits in the coming year. Though more and more investors are in a queue to grasp the investment opportunities, only some end up making the best use of such chances.

But why only some are able to make huge gains?

Mr Benjamin Graham, a renowned investor has rightly said “The investor’s chief problem—and even his worst enemy—is likely to be himself.”

Investors themselves are considered to be their worst enemies when it comes to making investment decisions. Much of the Behavioural Finance study (a field of study that attempts to understand market and investors’ behaviour) demonstrates investors are irrational and commit several cognitive errors.

So, the question arises that how can investors unleash their full potential and avoid cognitive errors that could result in wrong decisions?

Against this backdrop, let us discuss some investing tips for investors for 2020:

Avoid Remaining Consistent with Prior Beliefs and Actions

Generally, it’s a human tendency to stay consistent with prior commitments, words, ideas, actions and thoughts. Investors usually tend to adopt a consistent approach while making their investment decisions, ending up losing their hard-earned money.

This kind of problem is also referred to as recency bias, under which an investor ends up piling into a particular asset class as the investment has been delivering robust returns recently.

2019 was a remarkable year for the Australian equities market, with S&P/ASX 200 delivering significant returns (~22 per cent till 24th December 2019) over the year.

If investors remain consistent with their belief that the gains will continue in the coming year as well, their preconceived notions could result in cognitive errors. Rather, investors should consider several other factors while making any investment decision.

Do Not Blindly Accept Information Confirming the Existing Beliefs

One of the key mistakes investors make while investing is that they tend to accept the information that confirms their belief (already held) in an investment. When any such information emerges, investors usually accept it easily to validate their investment decision.

Such kind of psychological behaviour led to investors screening out possibly useful opinions and facts that do not accord with their predetermined notions. To avoid these errors, investors should seek information before-hand that might put a question mark on their investment decision.

Evaluate Relevant Information Only

To be a successful investor, one should carefully evaluate the relevant information to make a better-informed investment decision. Generally, investors assess useless information available through stockbrokers, newspapers and financial commentators, that has no correlation with the issue.

For instance, if an investor targeting medium term investment sells a stock based on short-term market price movements, he might end up selling some wonderful investments and instead buy some bad investments, generating losses.

So, investors planning to hold a stock for medium-term and long-term are advised to ignore daily commentary relating to share prices to beat a dangerous source of information bias.

Avoid Placing a Greater Weightage on Loss Aversion

Investors who are more cautious of making a wrong investment decision end up setting for default options. Such investors strongly prefer dodging losses than attaining gains, resulting in irrational and poor investment decisions.

For instance, if an investor holds on to his existing loss-making investments rather than selling it in the hope of earning their money back, he ends up losing many mouth-watering investment opportunities.

The following tips can help investors make superior investment decisions:

Ø Increasing focus on measurement of opportunity cost.

Ø Constraining a large number of investments in the stock portfolio.

Ø Thinking carefully about the risks attached to the investment.

Try to Get Rid of Mental Accounting

Many experts are of the opinion that an individual’s decision to spend is influenced by the source of funds. When individuals place different values on money depending on various subjective criteria, it is referred to as mental accounting.

Mental accounting affects the way an investor spends the money, resulting in detrimental outcomes.

For instance, if an investor possesses two stocks – one with a paper loss and other with a paper gain, and he needs to raise cash, he is most likely to sell the gaining one even though selling the losing one could be a rational decision.

Do Not Follow or Copy Other Investors

Some investors have a herd mentality as they tend to copy or follow other investors, resulting in herd bias. Such investors are largely influenced by instinct and emotions and are frequently seen herding with analysts’ recommendations, gravitating towards similar investments that others are buying.

Investors with a herd mentality lack their decision-making capability and work on the fear of missing out (FOMO) on a profitable investment. Herd instinct usually results in formation and burst of the asset bubbles in the financial markets.

Don’t Forget, You Cannot Control Investment Outcomes

If you assume that you have a complete control over the investment outcomes, you are definitely under an illusion of control. One cannot control the investment outcomes as there are many possibilities in reality than an investor thinks, often influencing the results adversely.

The illusion of control leads to over-optimism and overconfidence, hindering an investor’s progress towards financial freedom. The only way to come out of such an illusion is to accept that there are certain factors that are not under your control.

Though these investing tips could help an investor take more sound investment decisions, in addition, an investor should recognize where his own flawed thinking has hurt him in the past and assess his own biases.


Disclaimer

This website is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine Media does not in any way endorse or recommend individuals, products or services that may be discussed on this site. Our publications are NOT a solicitation or recommendation to buy, sell or hold. We are neither licensed nor qualified to provide investment advice.

Avoid Remaining Consistent with Prior Beliefs and Actions

Generally, it’s a human tendency to stay consistent with prior commitments, words, ideas, actions and thoughts. Investors usually tend to adopt a consistent approach while making their investment decisions, ending up losing their hard-earned money.

This kind of problem is also referred to as recency bias, under which an investor ends up piling into a particular asset class as the investment has been delivering robust returns recently.

2019 was a remarkable year for the Australian equities market, with S&P/ASX 200 delivering significant returns (~22 per cent till 24th December 2019) over the year.

If investors remain consistent with their belief that the gains will continue in the coming year as well, their preconceived notions could result in cognitive errors. Rather, investors should consider several other factors while making any investment decision.

Do Not Blindly Accept Information Confirming the Existing Beliefs

One of the key mistakes investors make while investing is that they tend to accept the information that confirms their belief (already held) in an investment. When any such information emerges, investors usually accept it easily to validate their investment decision.

Such kind of psychological behaviour led to investors screening out possibly useful opinions and facts that do not accord with their predetermined notions. To avoid these errors, investors should seek information before-hand that might put a question mark on their investment decision.

Evaluate Relevant Information Only

To be a successful investor, one should carefully evaluate the relevant information to make a better-informed investment decision. Generally, investors assess useless information available through stockbrokers, newspapers and financial commentators, that has no correlation with the issue.

For instance, if an investor targeting medium term investment sells a stock based on short-term market price movements, he might end up selling some wonderful investments and instead buy some bad investments, generating losses.

So, investors planning to hold a stock for medium-term and long-term are advised to ignore daily commentary relating to share prices to beat a dangerous source of information bias.

Avoid Placing a Greater Weightage on Loss Aversion

Investors who are more cautious of making a wrong investment decision end up setting for default options. Such investors strongly prefer dodging losses than attaining gains, resulting in irrational and poor investment decisions.

For instance, if an investor holds on to his existing loss-making investments rather than selling it in the hope of earning their money back, he ends up losing many mouth-watering investment opportunities.

The following tips can help investors make superior investment decisions:

Ø Increasing focus on measurement of opportunity cost.

Ø Constraining a large number of investments in the stock portfolio.

Ø Thinking carefully about the risks attached to the investment.

Try to Get Rid of Mental Accounting

Many experts are of the opinion that an individual’s decision to spend is influenced by the source of funds. When individuals place different values on money depending on various subjective criteria, it is referred to as mental accounting.

Mental accounting affects the way an investor spends the money, resulting in detrimental outcomes.

For instance, if an investor possesses two stocks – one with a paper loss and other with a paper gain, and he needs to raise cash, he is most likely to sell the gaining one even though selling the losing one could be a rational decision.

Do Not Follow or Copy Other Investors

Some investors have a herd mentality as they tend to copy or follow other investors, resulting in herd bias. Such investors are largely influenced by instinct and emotions and are frequently seen herding with analysts’ recommendations, gravitating towards similar investments that others are buying.

Investors with a herd mentality lack their decision-making capability and work on the fear of missing out (FOMO) on a profitable investment. Herd instinct usually results in formation and burst of the asset bubbles in the financial markets.

Don’t Forget, You Cannot Control Investment Outcomes

If you assume that you have a complete control over the investment outcomes, you are definitely under an illusion of control. One cannot control the investment outcomes as there are many possibilities in reality than an investor thinks, often influencing the results adversely.

The illusion of control leads to over-optimism and overconfidence, hindering an investor’s progress towards financial freedom. The only way to come out of such an illusion is to accept that there are certain factors that are not under your control.

Though these investing tips could help an investor take more sound investment decisions, in addition, an investor should recognize where his own flawed thinking has hurt him in the past and assess his own biases.


Disclaimer

This website is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine Media does not in any way endorse or recommend individuals, products or services that may be discussed on this site. Our publications are NOT a solicitation or recommendation to buy, sell or hold. We are neither licensed nor qualified to provide investment advice.

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Disclaimer
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