Investing with insight

Decoding your decision-making

No-one ever became wealthy without investing. Whether you are in the game already, or starting out, it’s a plan to understand the back-story on how you are making those five key investment decisions: why to invest, what to invest in, when is good, where is best, and for how long to hold on. Checking how you personally answer those questions may just determine whether you become a Buffett or a bean-counter.  As the great Buffett himself said, ‘The best investment you can make is an investment in yourself. The more you learn, the more you’ll earn’.

You can get a general picture of yourself as an investor simply by asking yourself a few vital-statistic type questions, and then a few uncomfortable ones; or by getting help from a professional or good investment software. An investment guru or financial profiling software will convert information about you into an ‘investor risk profile’, laden with terms like risk tolerance, impulse control, emotional behaviour, and biases. Yes, I saw you rolling your eyes there. But these are the aspects of your character that affect the way you make investment decisions, and which are worth understanding, as they will help you chart an investment roadmap.  Let us delve a little deeper.

The story of you

Where you are at in life, in age, stage, and earning, contributes to your ‘risk ability’ score – your current ability to even consider taking financial risk. The questions you or your advisor would ask are along these lines:  How old are you? Are you financially secure or is income a random event? Do you have assets and investments, or do you own a pallet-bed and a dog? Is your debt a small cloud overhead or a nuclear eruption? Why do you want to invest – to buy a real bed, a house, for your retirement, to grow wealth, or to hold value in existing investments?

These answers make up your risk ability, which contributes 70% to your risk profile, a clue as to how important these matters are in determining how much money you must invest, setting your investment objective, how much cashflow you will need, and how long you plan to hold onto the investment before cashing it in. 

You are unique!

The bumper sticker says ‘Remember… you are unique, just like everyone else’.  So humbling. Never mind, you are indeed special, a blend of individual characteristics which also define the way you make investment decisions. 

Here are the types of questions you need to ask yourself about your character when it comes to investing. Are you a flat-out risk-taker, reasonably sensible, or that special blend? Under what circumstances will you take risk? Do you act on impulse, or stand back and watch and wait while your crazy friends leap at those ‘never to be repeated’ opportunities? How do you react to good or bad news, and how do you respond in a crisis?

For example. You are going on holiday somewhere beautiful and new. You are speeding along, and you pass a sign to ‘AFRICA’S HIGHEST ZIPLINE!!!’. Do you swerve left and fly down there without a second thought, blow half your holiday budget and go zipping? Do you slow down and give your passengers the ‘should we’ evil eye?  Do you stop at the next lay-bye and contemplate all the pros and cons? Or do you pretend you didn’t see that sign and accelerate towards your holiday? 

Test yourself for different risk situations (walking on coals, swimming with sharks etc.) to get a feeling for what constitutes safe and allowable risk versus unacceptable risk – to you. In the end, this will help to compile your risk rating, which together with your impulsivity rating makes up your ‘risk willingness’ score. This contributes the other 30% to your overall investor risk profile.

Me, biased?

We love to think of ourselves as unbiased, but we collect prejudices like kids collect game cards.  Four of the many prejudices can really derail intelligent planning. An anchoring bias shows up if you are fixating on one aspect of an investment, like a hefty dividend, and you don’t read the rest of the stats on it. A self-control bias may pop up when you need instant gratification, and you consider selling an investment to buy a small island in the Indian Ocean. A regret aversion bias is when you do nothing, just to prevent being involved in a bad action-replay of a historic event, like a sudden major drop in a share price. And loss aversion bias is when you rush to take a risk to avoid a loss rather than to make a gain. These biases are all rather subtle, but one needs to know them and try and avoid them.

Life will interfere

The state of the world at large or at home, and how you perceive it, can also taint your investment decisions.  It is a good idea to be mood-aware, because there are so many large and small dramas lining up out there to make you grumpy. The biggies like war, political skullduggery, illness, death, divorce, or losing your job, can seriously mess with your positivity.  A negative frame of mind can cause you to make irrational, impulsive investment decisions.  

On the other hand, there will be those hey-ho happy days when the war ends, a tyrant is toppled, you win a substantial contract, or meet the love of your life – and then, who cares? You may wish to toss some money to the wind, fly to the moon, or sell your conservative shares and invest the lot in crypto. Also, a little irrational and impulsive.   

An investment advisor may suggest you avoid making any decisions on both these types of days and wait for a less exciting day when the sun rises and sets without the state of your world being re-ordered.

What a day!

And never mind those crises of life, there is also the daily state of mind to factor into one’s investment calendar. These are increasingly anxiety-laden days. After all, we live in relationship with All Things, including partners, workers, generation XY and Z, in-laws, wasps and stinging nettle. There will always be sunny-personality days and stormy ones.   

Though it seems counter-intuitive, a positive state of mind has been associated with fairly risky investment behaviour, as there is the hope of adding more emotional reward to the day. A thunderous or anxiety-ridden mood on the other hand is construed as heightening perceptions of danger, and motivating one to avoid risk. Which may be a good thing, at least you don’t make your day any worse.

But again. You may want to make your investment decisions on milder days, when your mood is calm, and you can think more neutrally.

Navigating your investment journey

All round, it looks like a hefty set of variables weighting your investment decisions.  Clearly it is a good idea to ‘know oneself’ in order to navigate. Really, to admit you are a lunatic risk-taker with rollercoaster impulsivity, or alternatively that every opportunity looks like a bad risk, is not comfortable. But it may just help you time your investment decision-making and be more even keeled in the investment process. Knowledge is power.

Armed with an understanding of your investment needs, your risk capacity, and your own character, you can develop an intelligent investment strategy, and over time coach yourself to either be braver or less impulsive, less or more patient, or to save the adrenalin for outdoor adventures. An investment advisor or an online profiling model is a good option to guide you through the process if you run out of steam for self-analysis.