WE can find both Chinese proverbs and English idioms that remind us about our limitations and not to be overconfident in making personal investing decisions. In Chinese, one such proverb is ‘bu zi liang li’. In English, we often hear this idiom ‘don’t bite more than you can chew’.
Knowledge and information that you possess will influence the quality of your own analysis and decision in making your investment.
Knowledge is your practical understanding of a subject. Information is the facts you have or can access. Sometimes you can have the knowledge, but not the information, to make a good investment decision. Conversely, you can have access to information, but not the knowledge to apply it.
Many times, investors lack enough knowledge and information to conduct a proper analysis.
Quality of thinking
Quality of thinking in investing is equally, if not more important. You will have to put things in perspective when you are chewing the information you have collected; especially now everyone is facing the challenge of information overload.
Know yourself
It is also crucial that you know your owns need, objective and purpose when making personal investing decisions. Those investment which misalign with your own needs and objectives will most likely turn out to be bad investments for you even though the investment class may be perfect to others.
Emotional intelligence
You need to be in charge of your own emotions when making personal investing decision but it is not easy.
Be mindful to use your head rather than your heart. Don’t get infatuated with the superficial factors.
One investor I talked with was boasting that now she has invested in a property in London because she thinks that London is both a big and beautiful city.
And don’t get too carried away by how well designed the advertisement of a property launch or a new fund; or how a unit trust management company boasted about the best manager or best fund award they received in the past year; or how impressive a public listed company was in their latest product or event launch.
Be mindful to look beyond such things. Your brain is easily influenced by good first impressions.
Over confidence
The most deadly mistake individual investors make is over confidence. Psychologists have determined that over confidence causes investors to over estimate their knowledge, under estimate risks, and exaggerate their ability to control events.
There are two main implications of over confidence especially for share investors. The first is that share investors take bad bets because they fail to realise that they are at an informational disadvantage. The second is that they trade more frequently than is prudent, which leads to excessive trading volume.
Another aspect of over confidence is that share investors tend to make judgments in uncertain situations by looking for familiar patterns; and assuming that future patterns will resemble past ones, often without sufficient consideration of the reasons for the pattern or the probability of the pattern repeating itself.
Lee Khee Chuan ChFC,CFP,CLU,FLMI,BA (S’pore) is a Bank Negara and Securities Commission licenced financial adviser representative (CMSRL/B1602/2011) and director, Advisory & Practice Management of Standard Financial Planner Sdn Bhd (SFP). Contact Lee at 016-888 0138 to see how independent financial adviser (IFA) can ensure that you are better advised in personal financial investing.