Thursday, 29 October 2015

Investment fears

"We simply aim to be fearful when others are greedy and to be greedy when others are fearful."

The quote above is one of Warren Buffett’s most famous investment maxims. It serves to highlight the importance of buying low and selling high; or not following the crowd. The reason this works for him is most investors don’t follow these words of wisdom.

This is partly because it goes against our in-built human instincts. These instincts and natural biases serve us well when coping with many day-to-day choices, but can be a hindrance when thinking about long-term investment decisions. These biases cannot be cured, but they can be managed. A better understanding of the mind can improve our chance of investment success.

It is these natural traits and ingrained biases that lead us to seek safety in the crowd, naively assume stock markets will keep rising, invest in overpriced shares, or bury our heads in the sand and try to forget about the decision at hand. Being aware of them does not mean creating a rigid set of rules to guide investment decisions. All investors have different objectives and will manage their portfolios accordingly. Rather, understanding their effects should help reduce their influence and enable us to work around them.

The problem is, even with some knowledge of how our minds work, having the confidence to go against all our instincts when hard-saved money is at stake is easier said than done. This is why many investors choose to let professional fund managers shoulder some or all of the burden.

The solution is to seek financial advice carefully.

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