Spread your bets and avoid herd mentality
"Remarkable" is the word to describe the short memory most investors suffer from.
Throughout my career as a financial adviser, I have come close to mastering the psychology of the investing public. The singular point to stand out from my study of investor behaviour is that buying and selling assets is an art that most practise daily, despite lacking a basic understanding of the domain. In that sense the words of Warren Buffett ring true: "Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway to work."
Today, every person you meet has an opinion on the property, stock and gold markets. What one forgets is that while most progressive countries have driven growth on the back of capitalism and greed, they have also come close to learning the basics and essential rules of protectionism, as opposed to markets with relatively shorter age since inception.
The non-theoretical reason behind market crashes and property collapses is in essence because of every investor seeking quick profit in the shortest possible time. After all, we no longer save up to buy our dream car; we simply borrow and achieve instant gratification. In the past, our needs were basic necessities; today, our desires are absolute necessities. This philosophy affects levelled thinking and directly influences the capital market in all its phases.
The blind desire to get rich quick and quickly achieve unrealistic financial objectives inevitably leads to the frustration concept: let's say you decide "I will be satisfied when I have X amount". Whether you achieve this ideal or not, you feel frustrated anyway because the target is never enough. Such psychological patterns lead to incorrect decision-making and disastrous investment choices.
Have we learnt nothing from the lessons of the past? Apparently not.
Investment pundits often recommend a simple strategy: "When everyone is rushing to do it, it is time to leave it, and when everyone is running from it, it is time to own it". However, few investors understand that the best time to invest is when an asset is undesirable while fundamentally strong, and an even wiser investor would set up a monthly buying plan that lowers the average cost of unit/investment bought.
To explain further, buying a property in principle is never eroded by the perception of the buyer. If a buyer today values their property at Dh100,000 it does not mean the property has shrunk from a two-bedroom to a one-bedroom unit. The only change is market perception - a perception that eventually shifts based on demand and supply or a neurotic wave of investor awakening.
When you plan to buy a property and decide to hold it for the long term, fluctuations in prices will mean absolutely nothing to you. Why would it matter if your property is valued at Dh100,000 or Dh300,000? Price matters only for those buying or selling.
The second fundamental rule of smart investing is to never put all your eggs in one basket. Illogical investors not only withdraw all their hard-earned cash from their term deposits to invest in property or stocks but also end up borrowing beyond their capacity hoping for a quick rise in prices. If you have been a victim of this syndrome, it would be prudent to remember you are not alone in your approach, meaning the pot of gain is much smaller than you think.
The psychology of investing is as paramount as economic indicators in determining the outcome of rising markets, especially those built on shaky foundations. I would like potential investors to consider why we often lose more than we gain. Ask yourself: how can I build wealth associated with wisdom and patience?
It is never too late. To undo old patterns, we should remind ourselves to diversify our portfolio over a class of assets such as property, equities, bonds, term deposits and high-paying safe savings accounts.
When a client requests the full liquidation of a secure savings account to invest in property, I am alarmed. I beg them to reconsider, to use up to 70 per cent leaving a reasonable sum that can protect their lifestyle needs for a year. Needless to say, my words often fall on deaf ears.
I hope this mindset changes, and the next time you are confronted with the dilemma - should I sell or should I buy - know that the answer is simple; when everyone including taxi drivers and blue-collar workers discuss property boom or bust, it is time to do the opposite of what they advise. Second, when you invest, do not put all your money on one horse. Why? Because every asset class is destined to experience a sharp fall on average every five years or at one point on the economical bell curve.
Loay Ragheb is the head of wealth management & group benefits at National Bonds Corp
Published: September 6, 2013 04:00 AM