How to Invest Intelligently Steps 10-12.

This part is all about getting some of our thinking sorted…..

 

10.  Understand the difference between investing and speculating

When is investing not really investing?  When it’s speculating!

What’s the difference?  Speculators seek to make abnormally high returns from bets that can go one way or the other, very much like gambling.  Investors seek to generate a satisfactory return on their capital by taking on an average or below-average amount of risk, sending their money to work in an environment where the rates of return are more reliable and standard.

It’s important to know which you are doing, because speculating is way riskier than investing.  And you need to be conscious about how much of your whole portfolio you are happy to speculate with.

 

See if you can pick which each of these examples are:

a) Paul’s work colleague enthusiastically tells him that a certain company listed on the share market  is just about to be taken over.  He’s sure their share price is going to skyrocket and says Paul should get in now!

b) Jenny buys a parcel of shares in a large blue chip company, after researching their last few years of company statements, and checking their various ratios and dividend values.

c) Mitch purchases a duplex off-the-plan on a fixed price contract, with a rental guarantee (until it is tenanted), with a guaranteed completion period of 4 months and strata titling as part of the deal.

d) Gaby buys units in an investment scheme which is going to purchase a group of apartments being sold as a bundle, renovate them, and then sell them separately over a staged period of time.

 

11.   Pre-plan to manage your emotions.

Generally speaking, our brains have 3 main control centres, which can be described as head (rational thinking), heart (emotions), and gut(automatic safety and survival responses).

Now which control centres do you think are the first responders to any new situation or information?

It’s our gut and our heart isn’t it.  (I suspect the order is gut then heart, as safety is priority number one for our survival.)

The head centre generally comes last.

This is ok, as long as we remember to include it!

It’s very simple really.  When we are evaluating anything in order to make a decision, we need to give room to all three control centres.  If we don’t pre-plan to do this, our instincts and emotions will win every time.

You’ve decided to keep $1000 per month to use for investing. It’s going well so far, and over the last three months you’ve accumulated $3000, and are about to decide where to invest it for better returns.  Your mobile phone rings.  It’s your best friend, and he is ecstatic about a fantastic deal for a luxury trip to the Maldives at half the normal price for a group of four people.  And of course the deal ends this week. Three friends are in, and they want you to join them.  How do you feel?  What do you want to do?  How do you decide?

What’s your first response?

What do you feel like doing?

After “sleeping on it” for 24 hours, what do you then think you should do?

The key to ensuring that your “Head” control system gets a say in the matter, is to SLEEP ON IT. Always give yourself time for the initial responses to complete their performance, then  after they’ve taken a bow, let the Head take the stage.

Your final decision should be made after listening to ALL THREE systems.

 

12.  Manage your Investments Regularly

Ahhh…..   wouldn’t it be nice to set and forget….

Doesn’t work that way though does it.  🙂

Schedule a regular timeslot in your calendar to evaluate your investments, and when you do, ask and answer these 3 questions:

i.      How have they performed?  (What was the annual growth rate?  What was the annual yield?)

ii.      Is this performance better or worse than what I expected or wanted?  If worse, what will I do about that?

iii.      Does the current value of my assets match my desired asset allocation? If not, what will I do about that?

 

 

Ok – now here are the answers to the exercise in step 10 above: (a and d are speculative, b and c are investments). How’d you do?

 

To your investing success!
Glenda

 

PS:  I often get private messages in response to my posts, and I’d love love love you to respond by commenting below so that other readers get the benefits of your responses!  (Plus – google views blog comments as a sign that we’re doing a good job, and takes more notice of us. 🙂 )