I met someone recently who told me he is swearing off the stock market for good. I asked him why. He told me that he lost a lot of money in the global financial crisis but he managed to recover all his losses in the ensuing recovery. That is good news, isn't it? Well, apparently, Mr. Market took back some of the gains in the last one year. So, he is still in a nett loss position.
I asked if his investments paid any dividends and he said yes but very little. He said that with the amount of time and effort he put into the stock market, he might as well just leave the money in a fixed deposit and save himself some headache (and heartache).
This person was not a very close friend but for some reason when I meet people, the conversation would steer towards investments and personal finance matters. Anyway, as I did not know the person very well, I did not want to volunteer too much information because it could come back to haunt me one day.
However, I could not resist asking if he had thought of REITs. He looked at me with frown and said he vaguely remembered reading in the newspapers that REITs were a waste of time. He asked why did I ask. I told him I have some investments in REITs and they have been very good to me. He was curious and asked me for more information. I was in a slight fix.
I believe that for any investor, the most important knowledge is not TA or FA, it is self-knowledge. Know ourselves and we will know if a product is suitable for us. Know ourselves and we will know if a certain something is what we have been looking for. We could have all the financial knowledge in the world but not knowing ourselves, we could end up having sleepless nights as investors.
Why are investors in the stock market? To make money. Why do drivers go on the road? To get from point A to point B. Well, that would be a logical assumption. There are many types of investors in the stock market just like there are many types of drivers on the road. Each type would have a distinct behaviour but they all share one primary reason for doing what they do.
Some drivers are speed demons and they also like weaving in and out of traffic. On more than one occasion, a speeding car which had overtaken my slower Mazda 2 a few minutes before would be waiting for me at the next traffic light a few minutes later. Of course, if the driver had not been stopped by the traffic light, he could have reached his destination a few minutes earlier. Just for a few minutes, why increase the risk of getting into an accident?
Some spend much of their time in the stock market looking for the next big thing. The theme is multi-baggers. Is this wrong? No, of course not. I do it too. If we could find a multi-bagger, we would be rewarded many times over. However, once invested, the waiting is the hardest. What if something were to go wrong? Luck plays a big part in success.
These days, I still do a spot of potential multi-bagger spotting but I am able to do it now with a greater level of comfort. Why? I have a thick cushion of capital gains and dividends received. On top of this, I have a predictable flow of passive income from my investments in selected S-REITs and some high yield stocks. So, it helps to reduce any feeling of anxiety if my spotting becomes spotty. Being comfortable, therefore, would contribute to our success rate and if we are honest with ourselves, we would agree that this rings true.
We have probably heard from gurus that we must be emotionless in the stock market. I am only human. So, try as I may, I am not totally without emotions. I know that we should be greedy when others are fearful but if I do not have a greater level of comfort, I find it hard not to be at least somewhat fearful. It is like a person on a flying trapeze. He would feel less fearful if he had a safety net, wouldn't he?
I am a creature of comfort in more ways than one. I must feel comfortable in anything I do. I believe every human being is the same. Now, when financial advisors ask us what is our risk appetite, they could very well be asking us what is the level of comfort we need before we might want to take the plunge. Why do they not ask it differently? I wonder.
Finally, after such a long winded discourse, I am back to where I started. I asked this person to closely examine what he needs in order to feel comfortable in being invested in the stock market. That answer lies within him and he has to be honest with himself. Once he has the answer, things would fall into place and he would know what to do. Ideally, anyway.
1. Of primates and their diet.
2. Trading to put food on the table.
3. A common piece of advice on saving.
4. To protect our wealth, we have to take risk.
5. Why do I not panic?