Successful investment begins with awareness of your human nature
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By Renzi Thirumalai
WHILE many people mistakenly believe investing is only for the wealthy, there’s a good chance most South African citizens are investors, often without realising it.
Even if you aren’t actively making calls on shares in the stock market, if you are a member of a retirement fund, or you have a unit trust or education plan, and even if you’re a member of stokvels, you are, in reality, an investor.
And as an investor you have a responsibility to yourself and your money to fully understand how your investment works. But even more importantly, you need to be aware of how your mind and your emotions work when it comes to making decisions related to money decisions. The actions you take (or don’t take) will impact your investment outcomes in the long term, and this is even more pronounced during times of a poor market or economic conditions.
While each of us is unique, with our own circumstances, money management habits, risk preferences and investment objectives, “human nature” is the one thing we all have in common and that means we all have built-in beliefs and biases that cause us to think and act in certain ways.
He says these cognitive biases can range from over-confidence in our decisions to an excessive fear of losing money, and even something called confirmation bias, which is a tendency to actively look for information that confirms our beliefs while avoiding any inputs that call them into question.
While some may believe that these human traits make most of us too irrational to succeed at investing, our “humanness” can actually be a good thing, and protect us from making bad investment choices. That is, provided we are aware of those biases, beliefs and emotions, and willing to honestly question them before making any decisions about our money.
Of course, when we recognise that we are investors, and we need to keep our human character traits in check to achieve investment success over time, the first question most of us will ask is: “How do we do that?”
There are three essential steps anyone can take to prevent their natural human behaviours from negatively impacting their investment outcomes.
The first, and possibly most important requirement, is that you become more aware of your personal beliefs, biases and behaviours and get into the habit of honestly assessing whether any of these are influencing the investment actions you may be planning on taking.
The second key behavioural management technique is to maintain your trust – in long-term market trends, in the professionals who advised you or are managing your investments, and even in the choices you made when you first invested. Unless your circumstances or investment objectives have substantially changed since you first invested, there is no reason to second guess those initial decisions you made, especially if that action is emotionally driven because you are trying to avoid painful losses or chasing gains in the short term.
And the final recommendation is to always maintain a sense of proportion in your actions. If you are confident you’ve taken steps one and two, but you still feel the need to take a certain action with your investments, you should try to do so in a measured way. So for example, if you are certain that switching out of higher-risk equities into bonds or cash is the right path for you at a given time, consider doing so with a portion of your investment rather than all of it at once. Rather spread the implementation of your decision over a period, and don’t try to time the market. That way you reduce the potential negative impact on your investment if it turns out that this wasn’t the best decision to make, or best time to do so.
Irrespective of the type of investments you have, the best way to improve the chances that they deliver the outcomes you want is to understand how your human nature can influence the money management choices you make, and then apply that awareness to keep emotions and biases from getting in the way of sound investment decisions.
Renzi Thirumalai, head of investments at FNB Wealth