Personal Finance Essentials

It is important to consider what kind of investor you are. Ask yourself questions like “How much do I dislike risk or uncertainty around financial investments?”There are several factors that usually affect how risk-averse you are:Level of wealthUsually, with higher wealth, people tend to take on higher risk since they have something to fall back toAgeYounger investors can afford to take more risk since they have higher flexibility and can afford to rely on future employment incomePersonal situation and liquidity needsPersonalityCommon psychological mistakes:Conservatism BiasThis is when investors tend to underreact to changes and opportunities. A good tip to combat this is to imagine that the information you just heard is the first thing you heard and then, use your prior views to reach a final decision instead of solely basing all your decisions on a single view.2. Representatives (stereotyping)This is when people tend to believe that a company will stay on the same trajectory simply because it has been doing consistently well.3. Disposition eventThis is the tendency of investors to sell stocks and hold on to underperforming stocks. One reason could be that they do not want to come to terms with the fact that they made a bad investment.4. Biased self-attributionWhen a stock does well, investors believe that it is due to their skill and pat themselves on the back. However, when stocks do not do so well or underperform, they blame their luck. This can lead to overconfidence and making rash decisions.5. Emotion of fearPeople tend to make rash decisions like selling everything in their portfolio during a market crash and end up losing quite a bit. A good strategy is to avoid making important financial decisions when experiencing extreme emotions and to wait until you are calm and can make rational decisions.Active investing/trading (quantitative) strategiesIt is not advised to implement these strategies on your own and is recommended to seek professional guidance.Momentum tradingInvest in a basket of stocks (winner stocks) that have been doing well in the past few monthsExploits conservatism biasPost-earnings announcement driftStock prices continue drifting in the same direction as their initial price reaction after an earnings announcementExploits conservatism biasThank you so much for getting this far! I hope you were able to obtain valuable insights from this blog and I wish you luck in your financial journey! Finance Essentials was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.
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Author: Prithika Hariharan

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