Know Yourself
Your well being depends on knowing who you are. All methods and strategies evolved from this very question. The more one knows himself/herself, handling market volatility becomes easier.
Financial advice that we receive both online and offline is generally one size fits all. It is not customised to the needs of the individual. Because this kind of advisory/insight is published for consumption by anyone and everyone. The problem in this scenario is that if all investors will do the same thing then the fundamental concept of the market will fail. Ex- Everyone wants to buy then who will sell?
What amount you should save, spend or invest is dependent on what is happening with the money you already have. That is why you need to know all the places this money is going. We get this information by following basic budgeting techniques. An investment that is risky for someone may not be the same for you. What type of risk you should take also depends on what stage of life you are in.
Types of Investors
To keep the insight that is offered in here, we have categorised investors into following groups:
In capital accumulation stage:
Learner – just started investing, most likely just started earning
Balanced – have been experimenting with investing money from some time
Adventurous – high risk high gain type person, have more than a decade to stay invested in, Most younger people below age of 50 should fit in this category
Capital preservation stage:
Moderate : need just more than inflation to maintain their wealth, have done already whatever experimenting they wanted
Conservative – close to retirement, they need their assets to support them now, can’t risk to lose all at this stage of life
Importance of Self Awareness
Investors need to know themselves well for several reasons.
Risk Tolerance: Understanding one’s risk tolerance is crucial in investment decisions. Some people are comfortable with high-risk investments, while others prefer safer options. Knowing your risk tolerance helps you choose investments that align with your comfort level, reducing the likelihood of panic selling during market downturns.
Financial Goals: Investors should be clear about their financial goals, whether it’s saving for retirement, buying a house, or funding a child’s education. Knowing your goals helps you develop an investment strategy tailored to achieving them within your desired timeframe.
Time Horizon: Your investment time horizon, or how long you plan to keep your money invested, greatly influences your investment choices. Those with longer time horizons can afford to take more risks, while those needing quick returns may prefer less volatile assets.
Emotional Stability: Investing can evoke strong emotions, such as fear, greed, and excitement. Knowing yourself emotionally can help you make rational decisions rather than being swayed by market fluctuations or the opinions of others (FOMO).
Investment Style: Each investor has a unique investment style based on their personality, preferences, and beliefs. Some may prefer value investing, while others may lean towards growth or dividend investing. Understanding your style can guide your asset allocation and selection process.
Behavioral Biases: Everyone is prone to cognitive biases like overconfidence, herd mentality, and loss aversion, which can lead to poor decision-making. Knowing your biases allows you to recognize and counteract them, leading to better investment outcomes.
Adaptability: Markets are dynamic and subject to change. Knowing yourself well enables you to adapt your investment approach as needed, like adjusting to market conditions, revising financial goals, or refining your risk tolerance.
In essence, self-awareness in investing brings discipline, aligns decisions with personal objectives, and helps navigate the complexities of the financial markets more effectively.
Lack of Self Awareness
Investors who lack self-awareness can make several mistakes in investing.
Overtrading: Investors who are not self-aware may succumb to the temptation of frequent buying and selling, driven by emotions or a desire to time the market. This can lead to higher transaction costs and lower returns due to mistimed trades. These people may leave the investing altogether after losing their capital.
Ignoring Risk: Without a clear understanding of their risk tolerance, investors may either take on too much risk, leading to significant losses during market downturns, or avoid risk altogether, missing out on potential returns.
Chasing Trends: You must have experienced that whatever stock you buy starts falling and after selling a stock its price starts rising. Investors who are not self-aware may fall prey to herd mentality, blindly following popular trends or hot investment tips without conducting their own research or considering their own financial goals and risk tolerance.
Lack of Diversification: Not understanding the importance of diversification, investors may concentrate their investments in a single asset class, sector, or even individual stock, exposing themselves to higher levels of risk if that particular investment underperforms. Concentration also has its own advantages, but this game is played with entirely different sets of rules.
Ignoring Fundamentals: In a haste to make quick money, investors who lack self-awareness may neglect fundamental analysis and rely solely on short-term market fluctuations or speculative information when making investment decisions. This can result in poor investment choices based on incomplete or inaccurate information.
Emotional Decision-Making: Investors who are not self-aware may let emotions such as fear, greed, or overconfidence drive their investment decisions. This can lead to impulsive actions like panic selling during market downturns or holding onto losing investments for too long in the hope of a turnaround. Emotions can be your best ally or worst enemy in the game of investing.
Confirmation Bias: Investors may seek out information that confirms their preconceived notions or biases, ignoring contradictory evidence. This can lead to a narrow perspective and poor decision-making based on flawed or biased analysis. The best strategy is to look for what has not been shown. Dig deeper, ask questions, doubt the motive of the advertisement of investing.
Lack of Accountability: Without self-awareness, investors may struggle to take responsibility for their investment decisions. They may credit themselves for gains and blame external factors or others for their losses. This prevents them from learning from their mistakes and improving their investment approach over time.
Final Thoughts
Overall, a lack of self-awareness in investing can lead to suboptimal decision-making, lower returns, and increased risk exposure. It’s essential for investors to cultivate self-awareness, understand their strengths and weaknesses, and continuously work to improve their investment skills and knowledge.