A VAST number of consumers today can easily access investment channels launched by various investment banks or tech financial institutions to manage their wealth with the gradual implementation of technology and digitalisation of many financial management tools.
Today’s sophisticated investors will need four key attributes to make proper decisions. I will cover the first two attributes the first part of our article:
Learning and knowledge
When I deal with many clients’ financial planning and problems, I can understand the “cause”. Some of them have made a loss due to improper investment and are forced to delay or cancel their life plans. Some even had to face the dilemma of not being able to fully retire.
When one makes an investment, one must recognise the objective of the investment. To set the tone, the objective comes from data collection; current situation analysis; future prospect analysis; and risk analysis.
One also needs to clearly understand whether the investment method and channel are legal; whether the platform or product has any other conditions as well as the charging method, among others.
A sophisticated investor will also need a series of relevant knowledge of financial products they are investing in.
Mental quality
When starting an investment, success or failure often comes from the investor’s personal mindset.
While many understand that the purpose of investing is to make profits by buying low and selling high, the opposite happens sometimes.
In my financial planning career, I have come across a few veteran stock investor clients who have succumbed to losses due to their mentality.
They have not clearly calculated factors such as their personal risk tolerance, the ratio of investment amount to total assets, investment period and their purpose of investment.
When an investor fails to consider the psychological impact of market volatility on themselves and their families, any excessive volatility can lead to doubts.
Their disappointments in investments made can lead to despair and pessimism, thus making them lose sight of their original intention of investing. This will eventually result in their investments ending up in failure.
Another costly mistake is the “to get rich quick” and having an “opportunistic mindset”. While some may have made considerable profits in short-term trading, they must be aware that their greed for fast profits can contribute to big mistakes in the future.
Short-term speculative investment winners have more requirements compared to long-term investors. They need a high-precision computing system; professional and fast intelligence collection; and an effective team of analysts to ensure that they have a higher probability of winning in speculative trade.
Think twice if you do not have these or your opponents will have an edge over you.
As you can see, the psychological make-up of an investors is extremely important. Investors can use a risk tolerance tests to measure the degree of volatility that individuals can bear, thus enable them to choose investment products and solutions that match them to promote a healthy wealth growth model.
In the next part of my article, we will look at how setting goals and datelines as well as diversification can also help increase the sophistication of an investor.
Julian Seng, CFP, is a licensed financial planner and a compliance director with Alpine Advisory Sdn Bhd. He is also a certified member of the Financial Planning Association of Malaysia (FPAM).
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
