As we near the end of 2012, I’m sure many of you are thinking about what great plans you had for your investments this year. For some, the thought will bring a smile – you achieved what you set out to do. For others, a bit of internal conflict – your investments have not really done what you thought they would do.
Don’t worry. We have all been in both situations. Still, I often find people fit more into the second basket: “I did not achieve what I set out to do”. So, I have set out four reasons why your investment may not be performing, all of which boil down to a common message about how people go about investing. Sometimes you have to go against human nature!
1. You follow the herd
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At a basic level we humans like to be a part of a tribe; we gravitate to religion, and to sports clubs (I’ve met many mad Collingwood supporters). We become car fanatics or screaming groupies who follow the latest boy-band’s every move. Being part of a herd gives us a sense of belonging, but when it comes to investments, this instinct will actually hold you back.
Taking the contrarian view is far more profitable when it comes to your investments because you enter when demand is low and exit when demand is high. This goes against the grain of the herd instinct. Safety in numbers is fine when walking down a dark street, but with investments you want to buy before everyone else – and let the herd take the price higher.
Often people follow the herd because they don’t know what to do and so simply follow with an attitude of “if everyone else is doing it, then it must be fine”.
2. You don’t know where to start
I could have titled this point “You are lazy”, but that’s not entirely correct. Lack of action is more often a result of not knowing what action to take. Many Australians don’t really understand money or investments. Spending time thinking about various investments and gathering the research necessary is too challenging, so they simply don’t do it.
The whole financial industry relies on this type of person as it means a good supply of long-term clients who are unlikely to change products or providers – great for them but not for you. However, since you are reading this article, you already stand out from the crowd. Good for you. Keep looking, reading and learning, and you will find it easier to act.
3. You are scared of risk
We are all afraid of losing – that is also human nature – but it can mean you either don’t invest at all, or only invest in things that the masses invest in. Alternatively, you hold onto a share you are losing on, justifying this by saying to yourself that it is OK as the share will come back one day to what you paid for it. Fear of losing often results in losing more, either through holding poorly-performing assets or in missed opportunities. The answer? Proper research and learning when to cut and run.
4. You are impatient
Wouldn’t it be great if, from day one, we all got positive returns? For most of us, when that does not occur, we switch to the next investment opportunity. Research shows the investors who continually move investments, chasing growth, miss what they are chasing. For example, the managed funds on top one year are generally not on top the next. Investors switch funds hoping to cash in and find that the horse has bolted.
And so …
Let me share my biggest lesson: to be successful at investing you need to have a strategy. Strategy comes from being educated and informed as to how to invest and having proper independent research. Once you have this, the process of investing to meet your goals can be quite simple. So rather than follow the herd, I suggest that if you are not getting the results you want then it’s time for you to break out of your comfort zone and join those investors – who are in the minority – who have a proven, consistent approach.
Over the medium to longer term, those with a good strategy will save time and energy and, more importantly, get results.