Sunday, June 30, 2024

Are You Mentally Prepared For Investing?

Having enough capital to start off the investing journey is one thing, but whether one is mentally prepared to undertake the road is another. In my opinion it is important to ready up one’s psyche before jumping into the fray, as this mental strength is needed throughout; falter and the whole thing will unwind itself.

For this blog post, I will provide a simple three-step guide on whether one is ready for the long arduous investing road ahead.

Picture generated by Meta AI

Step #1: Why Are You Investing?

The first thing one needs to know is why he/she is investing. Planning for retirement? That is a good one. Saving up for a kid’s university education? That is another good one, too. Never mind how detailed it will be (i.e., calculating the future value, etc.) as this can be worked along the way. The main thing is to have a goal in sight.

If one starts off without any clear coherent aim in mind, or just doing what others are doing, or as a means to get rich quick, these are red flags, and it is better to be hands-off from investing until the above are resolved.


Step #2: Acknowledge And Embrace Risk

As I had said many times, risk is one must live with in investing (and trading). The need to acknowledge that these risks exist forms half of the picture here and be able to embrace them forms the other. By embracing, one must learn that risks are just the possibility and probability of them occurring and these are to build into the mindset.

Not all risks are created equal; the possibility of being knocked down by a vehicle is there, but the probability is lower for a person who looks out for traffic while crossing the road than one whose ears are stuffed with earbuds playing loud music and just jiggle across the street. Similarly on the investment front, the possibility and probability of a company’s share going to zero is more likely than a brokerage firm absconding the funds away. If one is totally risk adverse, or even if not, allocate the possibilities and probabilities of all risks equally, would need to take a step back.


Step #3: Perceiving Opportunity Costs

The adage of “only invest with money you can afford to lose” holds true to a certain degree. While it is ideal not to lose money, there will be times when an investment did not go as planned in terms of losses. If the thinking then was “I should have gone for the other financial instrument as the returns over the period are far better than this losing one”, this is okay as one is perceiving the opportunity costs in a professional manner.

However, if the thinking was “I could have one month’s worth of my meals in my losses there”, that would be, in my view, a sign that one is not mentally prepared. The separation between our daily lives and investments is important as we do not want to spill the element of emotions into the latter, which is ill-advised and at times, dangerous. This may result in an early termination of an investment plan, and worse off, a complete abandonment of the markets and never to come back.

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