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Set up your plan, automate everything you can and try to ignore it! Get busy living the rest of your life.
The White Coat Investor repeatedly tells us to make a written investment policy statement. Passive investing Australia suggests a 3-month cool-off period when the urge to change your investment strategy occurs.
Boom, Boom, Crash
The investing world is currently going a little nuts. Heading online is like walking into a Las Vegas casino. So much grabs your attention it’s kind of hard to think straight.
Every few minutes there seems to be another “once in a lifetime” opportunity to get rich quick. We all logically know the casino is a business, designed to financially outplay us. Yet people go back over and over, often feeding any winnings straight back into the casino business.
Online many investors claim to have struck gold with speculative investments that have multiplied in weeks. All the investing groups have frequent discussions about cryptocurrency and tesla. A few smart ones who got in early have made a killing. It’s hard not to feel you are missing out.
Previously stable, boring investors are abandoning their financial plan for a punt on these kinds of bets. Many end up self-sabotaging their financial future.
Even the property market is getting in on the action, with valuers unable to keep pace with the frothy enthusiasm of property purchasers abandoning all caution to secure that property before the champagne runs dry. With APRA threatening to shut the party down, I feel it’s time for a little caution to return!
History Repeats Itself
This all sounds pretty similar to the stories of warning I read over and over again in investment books. Tulips. Tech. Dot.com and mortgage-backed securities in the GFC. An absolute frenzy of money-making and euphoria preceded a devastating market crash. Widely diversified investors got through it if they clenched their muscles and held despite the doom. Those that had speculated in the hyped stocks often lost it all.
No-one wants to be the last idiot to press buy.
The Boring Middle
If you are a long term property and/or index fund investor, this is not where your excitement in life comes from! You have a solid plan, and are executing it. But it takes a long time. Meanwhile you are hearing about speculators doubling or tripling their bets in a few months.
The grass can start to look greener on the other side.
“Of the 35 analysts following the stock,
13 have a “strong buy” or “buy” recommendation,
another 11 have a neutral or hold recommendation.
Of the rest, seven have a sell recommendation, and only four a “strong sell.””CNN Business on Tesla in January of this year.
This is the risk time for abandoning your investment plan. WCI and Passive Investing recommendations of having a written investment plan and a 3 month cool off period are excellent. Both of these will help prevent impulsive changes due to FOMO. I would add those in a couple to have to run any changes past their partner.
A study found that investment accounts accessed by two people had the best returns, in comparison to a single male or female investor. Men and women are quite different in their approach to investing. Working together tends to reduce their weaknesses and compound strengths. Same sex couples may not be so extreme in their different investment behaviours. It is, however, still likely there will be a more cautious and more aggressive investor.
Cautious investors need encouragement to get in the market in the first place, instead of hoarding cash (being constantly devalued by inflation). Aggressive investors need a reminder that trading fees eat into return, and to minimize speculation.
Choose your Investment Strategy
The main strategies include:
- Capital growth buy and hold (pay down debt, rental income increases gradually)
- Capital growth buy, hold and sell to realise cash
- Active investment strategy – Buy, renovate and hold or sell (forcing increase in equity to allow further borrowing)
- Yield buy and hold (brought based on income provided by the investment) residential or commercial
- Principle place of residence buy for capital growth (and a wonderful home, with a big mortgage). Sell capital gains tax free to downsize in retirement
Share Market Portfolio
– Index ETFs or managed funds buy and hold (easiest option and proven generally most successful!)
– Buy and hold capital growth focussed shares (expect growth over time in price)
– Buy and hold high dividend yielding stocks (focus on income + franking credits)
– Buying individual stocks or other assets (eg crypto) based on an anticipated capital gain and selling once the price has risen. This can be very short-term i.e. “trading” or holding for months to years, but actively reviewing whether the asset should still be held.
Times to Review Your Investment Strategiies
There are times you need to review your investment strategy and perhaps adjust them. These are
- When the market is boring and you are calm and unemotional
- When you reach a pre-determined age (eg 50) and plan to adjust your asset allocation accordingly
- After a pre-determined number years of investing to review returns, decide whether you are happy to continue with the same strategy
- At planned rebalancing times (plan in advance to rebalance every 1-2 years, or if there is a significant difference between planned and actual allocation percentages).
- Without research, you need to understand the fundamentals of the asset. You need to find the data and form your theory
- Following the herd – Family, friends, colleagues, online friends and investing newsletters all get the blame when investor lose a lot of money.
- In the next sexy investment everyone is overexcited about (unless you absolutely understand it, hopefully you would have already got in before the general public hears about it)
- More than you can afford to lose (particularly if speculating)
- That feels like gambling.
Avoid Succumbing to FOMO
- Have a written investment plan
- Have a 3 month cool off before changing investing strategies
- Run all changes past your partner in life
- Ask yourself the tricky questions – work out what price you would consider the investment as “fully valued” before taking the plunge. You obviously only want to invest at a price below this value
- Practice patience by distraction. Don’t watch the stock market, make your life more exciting
Aussie Doc Freedom is not a financial adviser and does not offer any advice. Information on this website is purely a description of my experiences and learning. Please check with your independent financial adviser or accountant before making any changes.