Smart Money or Blind Bet: Assessing Your Investment Approach

This was originally posted on Planner Bee.

Investing and gambling may appear similar on the surface, but they have distinct differences. It’s important to distinguish between the two to ensure that you make informed financial decisions.

Wondering if your investment endeavours seem more like gambling than they represent a strategic financial plan? In this article, we’ll equip you with tips to assess your approach to investment, to help you make ones that align with your financial aspirations.

Are You Gambling Under the Guise of Investing?

If you or someone you know shows these signs, it may be worth relooking whether your investment methodology is truly sound.

1. Chasing frequent highs and lows

If you find yourself constantly chasing quick gains and losses, prioritising short-term market fluctuations over long-term growth, it may suggest a gambling mentality rather than one focused on strategic investing. Genuine investments are based on sound analyses and patience.

2. Taking highly leveraged positions

Taking on excessive debt or leveraging investments beyond your means can be risky and speculative, resembling gambling rather than calculated investment strategies. It’s crucial to maintain a balanced approach to risk and leverage.

3. Investing solely based on intel from friends or communities

Relying only on tips or recommendations from friends, online communities, or social media platforms can lead to impulsive and uninformed investment decisions. FOMO, or the “fear of missing out”, can drive individuals to follow the crowd without conducting proper due diligence. A recent article by Reuters said unbacked crypto assets can be considered “a form of financial gambling without any socially or economically useful function”, and showed just how easy it is to fall for such herd tendencies.

4. Holding losing positions despite changing conditions

Refusing to let go of loss-making investments, even when the original entry conditions have changed or turned negative, is a sign of emotional attachment and reluctance to cut losses. This behaviour can be indicative of a gambling mindset rather than prudent investing.

Read more: The Real Key to Investing: Being Aware of Your Behavioural Biases

Questions to Ask Before Investing

1. What’s your risk tolerance?

Assess your willingness and capacity to tolerate fluctuations and potential losses in your investments. Understanding your risk tolerance will help shape your investment strategy and asset allocation.

2. What are your investment goals?

Clearly define your investment objectives. Are you saving for retirement, aiming for long-term growth, or seeking income generation? Your goals will influence the types of investments that align with your desired outcomes.

3. What is your desired time horizon?

Evaluate your investment time horizon, which refers to the length of time you can commit your funds without needing to access them. Longer time horizons allow for more aggressive investment strategies, while shorter time frames require a more conservative approach.

Different Types of Investments and Their Role in Achieving Financial Goals:

When considering investments, there are several options that can help you reach your financial goals.

1. Exchange-Traded Funds (ETFs)

ETFs are investment funds traded on stock exchanges that aim to replicate the performance of a specific index or asset class. They offer diversification, affordability, and flexibility, making them suitable for long-term investors seeking broad market exposure.

2. Real Estate Investment Trusts (REITs)

REITs are investment vehicles that pool funds from multiple investors to invest in income-generating real estate properties. REITs provide opportunities for regular income distribution and capital appreciation, making them attractive for those seeking stable returns.

3. Cryptocurrencies

Cryptocurrencies have gained popularity as a digital form of currency and investment asset. While they can provide high returns, they also carry significant volatility and risk. Cryptocurrencies are best suited for individuals with a higher risk tolerance and a deep understanding of blockchain technology and the associated risks.

4. Property

Investing in real estate properties can provide both income generation and potential capital appreciation over the long term. Property investments offer stability and can be a viable option for those seeking a tangible asset with the potential for rental income and long-term growth.

There are many more investment options you can consider including in your portfolio. When in doubt, speak to your financial advisor, or if you’re taking the DIY approach, always keep yourself up-to-date with the benefits and risks of each type.

Read more: Dollar-Cost Averaging: What Is It, and When Is It a Good Investment Strategy?

Choosing the Right Investments for Your Needs

First, identify your specific investment goals and align your investment choices accordingly. If you’re aiming for retirement, it’s good to invest in a less risky and longer term asset. If you’re in your 20s, you have time on your side so compound interest is your best friend. Regardless of your goals, read up on articles and talk to professionals to understand the unique considerations for your age group.

Secondly, plan for a longer time frame. Recognise the importance of time in investing. The longer your investment horizon, the more risk you can generally afford to take. Consider increasing your time frame for realising your investments, as this allows for potential growth and recovery from market fluctuations.

Last but not least, start small and treat it as a learning process. Begin your investment journey by starting with small amounts and gradually increasing your investments as you gain knowledge and experience.

Treat investing as a learning process, where you continuously educate yourself about different investment options, market trends, and strategies. This approach helps you build confidence and make better-informed decisions over time.

With all that said, how do you properly invest without gambling?

1. Diversify Your Portfolio and Rebalance Often

One essential strategy for successful investing is diversifying your portfolio. Diversification involves spreading your investments across different asset classes, industries, and geographic regions to reduce risk. By diversifying, you can potentially mitigate the impact of any single investment performing poorly.

For example, instead of investing all your funds in a single stock, consider allocating them across stocks, bonds, real estate, and other investment vehicles. Regularly rebalancing your portfolio is equally crucial. Rebalancing involves periodically adjusting the asset allocation to maintain the desired risk level. It ensures that your portfolio stays aligned with your investment goals and risk tolerance.

2. Don’t Follow Hype Without Understanding Fundamentals

Investing based on market hype or the latest trends can be a recipe for disaster. It’s essential to conduct thorough research and understand the fundamental aspects of any investment before committing your money.

Look at the big picture, and take into account metrics such as the company’s financial health, industry trends, competitive landscape, and growth potential. By focusing on fundamentals, you can make more informed decisions and avoid being swayed by short-term market fluctuations or speculative trends.

3. Seek Professional Advice

While it’s possible to navigate the investment landscape on your own, seeking professional advice can provide valuable insights and expertise. Financial advisors or investment professionals can help assess your financial situation, understand your goals, and recommend suitable investment strategies.

They have the knowledge and experience to guide you through the complexities of investing, helping you make informed decisions aligned with your objectives.

4. Trade Methodically

Approach trading with a methodical and disciplined mindset. Develop a trading methodology or strategy that suits your investment goals, risk tolerance, and time horizon. Some popular trading methodologies include:

• Value Investing: This approach focuses on identifying undervalued stocks or assets that have the potential for long-term growth. Investors using this strategy analyse financial statements, market trends, and company fundamentals to uncover opportunities.
• Growth Investing: Growth investors seek companies that demonstrate rapid revenue and earnings growth potential. They often target industries or sectors expected to experience significant expansion in the future.
• Index Investing: Index investing involves tracking a specific market index, such as the S&P 500, by purchasing a fund or ETF that replicates its performance. This strategy offers broad market exposure and is known for its passive approach.
• Technical Analysis: Traders employing technical analysis use charts, patterns, and statistical indicators to predict future price movements. They focus on historical price data to make buying or selling decisions.

Want to start investing yourself? Check out: Investing 101: What You Should Look Out for As A Beginner Investor

By adopting a well-defined trading methodology and sticking to it, you can maintain a structured approach to investing, reduce emotional biases, and improve your overall chances of success.