How your mind stops you from investing

I heard you made so much money investing in...

Bitcoin? Property? Stocks? Well, I am sure you’ve heard all of these from someone. 

I have a couple of friends that love risky business – or what I would call risky. These include cryptocurrencies, forex trading and other online (which I believe is dodgy) dealings. 

As you can tell, I am biased. And I thought the whole time they are insane. Although I don’t advocate these investments, I stood by and watch them make quite a bit of money from these investments.

The point is we are all biased. We thought people were insane investing in Airbnb, Uber and other disruptive technologies. We thought people needed a serious high five in the face with a chair that invested initial capital in startups and businesses, as they are doing risky deals. Aren’t they gambling?!

And then these companies win. Big. 

And then others lose. Big.

Hindsight is 20-20

We don’t have all the answers, but one thing is clear: we look at our investment decisions (ETFs, property, business, etc. ) now and question why we made the choices we did. Yet, when things are looking peachy, we pat ourselves on the back and don’t think about it as anything special. 

The truth is hindsight always looks 20-20. 

We even go as far as to tell others how terrible that investment class is. It’s appropriate to mention a little thing that happens here in our brains. If we had one bad experience in something, every time we recall it, we make it bigger and worse than what it was. Here’s an example:

You invested in a property. The price didn’t rise as fast as you thought it would. Now all property is a bad investment. And you can look back and prove it with your experiences.

The art of believing [insert investment here] is a bad investment

In all of this, there’s also the issue that we have limited knowledge. We don’t know everything and anything we don’t know is risky.  This is an easy way to make small talk with people and tell stories of hear-say about what we heard about investments. 

We are conditioned to accept the known things are correct, even if they are not. 

Confirmation bias and specialisation

For example, we heard that property is a bad investment. We then go out of our way to find websites and people that also believe the same as we do – all to prove that we’re correct and the others are wrong. English calls this confirmation bias – the process of finding new evidence that confirms our beliefs. 

I get this every now and again from people on Twitter. Yet, for some odd reason, I am getting better returns than many of their ETFs and their shares. 

So what makes me different? It’s all about what you know about your industry and your chosen investment vehicle. You can make money from property. You can make money from stocks – and many do! The lesson is this: know what you are investing in. Learn and grow in your chosen investment sphere. 

Doubting your investments

Doubting if you made the right investment decisions is a normal thing. Even if your financial adviser tells you it was the right decision, we still doubt. This could happen when you pay the bond and transfer costs on your property, your ETF  investment value falls to 60% of its original value or you don’t see the growth in the first year.

Please, don’t be disheartened – stay committed. 

Cognitive dissonance

Cognitive dissonance is a simple concept with a far reaching consequences:

the state of having inconsistent thoughts, beliefs, or attitudes, especially as relating to behavioural decisions and attitude change.
– Google

Many people don’t believe in an investment (e.g. retirement annuities) but sadly still invest it. Many people don’t believe in buying a primary residence but do so because their partner wants a glorious home that you cannot afford.

The take home from cognitive dissonance is to be fully mindful of your flaws and your beliefs that are contrasting and not aligning. Know what you can change and what you cannot change on this.

Conclusion

We often ruin good investments through a lack of knowledge. 

If you don’t know about an investment class and would like to invest in it, do your research and go for it! 

Be mindful about the mind tricks.

Don’t let a lack of knowledge cloud your view. Gain the knowledge you need, and move forward with investing.

Happy investing!

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