In the epic Mahabharata, Lord Krishna delivers famous words of wisdom to Arjun compiled beautifully in Bhagwad Gita. Most of his sermons are directed towards “Knowing Your Self”. Buddha addressed the same topic through the concept of “Enlightment”.
Individuals are largely ignorant about their own abilities. Sometimes, it requires coercion for them to know what they are capable of. Our teachers in school do that in our formative years. Mother bird pushes baby birds from tree top to give them confidence that they can fly.
Investors are exactly like that. Most of them are highly ignorant and need assistance. They don’t know what they are capable of when it comes to investment behavior. Forget about capability; they don’t even know what they OWN. That’s more than ignorance. It’s carelessness.
When investors come to me for comprehensive financial planning, one of my questions is whether they know their net-worth or not. Most of them are confident in their reply but the actual computation of wealth varies significantly from their assumption. My next question to them is usually on the asset allocation and the returns they are generating on their current portfolio. Sadly, the answers are airy-fairy. They have no clue.
If an investor wants to create investing wealth he should know where he currently stands. That’s the initial point. The next step is to know where he wants to go. All races have a finish line. While the human potential is endless, it’s best to be realistic and set goals accordingly. No point in bravado. When panic sets in, knots in our brain get more tangled and pronounced. So keep your plan simple and implementable.
Of course plans need to be reviewed at a defined frequency. Course correction is not a bad idea based on a thorough analysis if goals are not being met. Investor also needs to decide whether he wants to run a 100 meter race or a marathon. There are more chances of faltering in a 100 meter race. Your peers may be miles ahead if you are running a marathon. Knowing yourself helps immensely here if you want to determine which race you should run.
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Another common resistance among investors is inability to accept proposed change due to comfort bias. Most Indian investors have an enhanced weightage to real estate in their portfolio. The general perception is that real estate gives astronomical returns with zero risk. Thinking is same when it comes to the yellow metal. I have also come across a lot of business promoters who feel that everything that they earn should go back into their own business for investments.
Unfortunately this is not right way to invest. These asset classes have their own benefits and perils in the investing world just like other asset classes. Diversification across asset classes is as important as diversification within the asset classes.
I am also reminded of a story where a group of animals had to cross a river. Giraffe entered the water first, told others that water was not deep and all of them could safely cross the river. Tragically, most of his friends drowned in depths of water. Moral of the story is that investors should not blindly ape the investments of their friends or other successful investors. Remember their investment strategy, style and behavioral patterns may vary significantly from yours.
There is no rocket science when it comes to investments. Success lies in the simplicity of investment plan and knowing your own self as an investor. Try it out!!