Posted: October 06, 2011
The no. 1 investing technique
It isn't what you thinkBy Ron Phillips
What is the most important investing technique available? Is it technical or fundamental analysis? Is it value or growth investing? Is it low P/E investing? Or momentum investing? Or alternative assets like commodities?
The answer: It's psychology.
Three investing-psychology biggies are accurate thinking, informed decision-making and calculated risk-taking. These skills will help you filter through the media clutter, bad advice, lies and emotions that come along with the game of investing.
Principle 1: Accurate Thinking
While speaking with investors, I run across many deeply-held misconceptions. Some think that CDs are the safest investment. They are not. They are subject to interest-rate risk and inflation risk. Some believe in guaranteed real estate investments. As we have seen recently, real estate is anything but stable and definitely not guaranteed. Some think they are diverse if they own 8 different mutual funds. They may not be if those funds are holding similar or identical investments.
To have accurate thinking, you need investing knowledge. Not everyone has this solid foundation. If you need more fundamentals, you can contact me and request a free copy of my first book, Investing To Win. I wrote this 100-page book as if I was giving investing basics to my kids. I wanted it factual and easy-to-read. This will give you the groundwork needed for accurate thinking.
Principle 2: Informed Decision-Making
The most vital part to this principle is information. Make sure you are getting high-quality information from a variety of respected sources. Then do your own thinking.
Another crucial piece is emotions. For example, an investor has two different advisors. One is more likeable than the other. He has better "bedside manner" and is more polished. Yet, the second advisor provides more and better information and does not exaggerate claims. This is a moment to gain control of our emotions and work with the more-informative advisor.
More emotional roadblocks are market swings and advances. If the market has already dropped significantly, it is probably too late to sell. The damage is done. Should an investor still sell low, on emotion, only to buy back later at a higher price?!
Be informed and in control. Why was Warren Buffett buying during The Great Recession and this recent market correction? He is in control of his investor psychology.
Principle 3: Calculated Risk-Taking
Another risk is opportunity cost. That means if an investor plays it too safe they may be missing growth opportunities.
The S&P 500 companies are expected to be at historic high earnings this year and next year. The U.S. economy is estimated to be higher every year up to and including the year 2016.
Now could be the time to ignore the pessimism, pull the money from the mattress and consider more calculated risks.
Ron Phillips is an Independent Financial Advisor and a Pueblo, Colorado native. He and his wife are currently raising their two sons in Pueblo. Order a free copy of his book "Investing To Win" by visiting www.RetireIQ.info or leaving a message on his prerecorded voicemail at 924-5070. Simply mention Promo Code #1001 when ordering.