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The possibility of following bandwagon in a bull market is high. It becomes increasingly difficult for investors to pursue a definite investment objective. You are presented with diverse opportunities in the markets. As the choices increase, shaping, managing, and monitoring investment portfolios become more complicated. Which investments will generate the highest returns without exposing you to excessive risk? Your ability to make right move in this situation however depends on how adhered you are to your investment principles.
What differentiates a very successful investor from the less successful ones is the ability to have clear investment objective(s) and pursue such objective(s) with a set of principles or strategies that is not compromised. While it is not news that the capital market provides an avenue for long term fund to be raised, the randomness of the market could also make one record a great capital loss.
The noise in the market, sentiments and bandwagon nature of the market, if not properly managed, could make you a casualty of the market randomness.
Therefore, the most important investment decision you can make is deciding on investment philosophy. It is a philosophy but it could also be called an investment style or an investing strategy. “Philosophy” implies the over-arching beliefs of the investor. The overall set of principles or strategies that guide an investor. This explains his investment motive(s), approaches employed in investments, and so on. Investment Philosophy is the “why” of each investment you make. It guides you and helps you make decisions – should you invest in a fund, fixed income securities or should you buy a company share?
To be successful with any investment strategy, you have to begin with an investment philosophy that is consistent and also matches not only the markets you choose to invest in but your individual characteristics.
An investment philosophy is a coherent way of thinking about markets, how they work, and the types of mistakes that consistently underscore investor behavior. It is a general approach that directs the decisions related to the investing of capital and it embodies a certain style or a set of core principles undertaken by an investor. Choosing an investment philosophy is an important task. An investment philosophy may be indicative of various personal and professional attributes. Thus an investment philosophy of a more aggressive investor may tolerate substantial risk by focusing on high growth stocks, while a conservative investor might instead be interested in stability and long-term rewards.
Therefore, as you are constructing your portfolio this year, make sure you have a very clear investment objective(s). The very first step in personalizing your investment is determining your risk tolerance level. This is not difficult. Investment professionals will help you to determine your tolerance level and assist you to develop the “heart of an investor”– that is, being in a state of mental fitness as an investor. At another time, I will discuss mental fitness for traders and investors
Tolerances
You must come to the understanding that the value of an investment in the stock market will change daily and be prepared to accept these fluctuations and extended periods of low or negative returns to earn a potentially higher return over the mid-to-long term.
It is not enough to know your risk tolerance level. While this knowledge and your ability to define your investment objectives are crucial, your ability to allocate your resources based on your appetite for risk and your investment motives is very significant. For instance, the investor, who believes that markets overreact to news, may develop a strategy of buying stocks after large negative earnings and selling stocks after positive earnings surprises. An investor who believes that markets make mistakes in the aggregate may look at technical indicators to find out whether the market is over-bought or over-sold and take a contrary position. The other investor who believes that market mistakes are more likely when information is absent may invest in stocks that are not followed by analysts or owned by institutional investors.
It is then necessary for you to allocate your resources based on your risk tolerance, investment objectives, and liquidity needs. Thus, in constructing your investment portfolio, consider only quality stocks, and have a long-term view of the market – this will not subject you to unnecessary pressure as prices swing and always engage the service of competent professionals because, amid advisers, there is safety.
