When it comes to property investing, a lot of it is about the approach that you take in terms of strategy. With terms like ‘appetite for risk’ and ‘debt comfort levels’ it’s certainly appropriate to make sure your mindset isn’t holding you back.
Luckily, sorting out your own thoughts and personal preferences for investing is fairly simple, but it’s something most investors overlook.
Colin Nicholson, author of ‘The Psychology of Investing’, explains that the different ‘temperaments’ or characteristics that you have is crucial to being able to understand how and why you make your decisions. And, as a result, how and why you invest in a certain way.
Understanding these elements will enable you to avoid your own natural pitfalls.
“You need knowledge about what you’re investing in, you need to understand how to analyse the investments you’re making and how to control risk, and finally you need to understand yourself,” he explains. For most investors, this is an overlooked and missing ingredient.
“The first critical thing, is to understand yourself and who you are,” Mr Nicholson continues. “Your investing experience is important, no matter what you invest in, as eventually the market will eventually turn a search light on you and on who you are. It will find the weak points.”
While it's not possible for someone else to tell you "who" you are, it is possible to give yourself a once-over to find out where these investment weak points lie.
So, what do you do and how do you do it?
- Have a ‘devil’s advocate’
If you find yourself saying blanket terms, such as 'every property doubles in value within seven to 10 years' then you'll definitely need to take onboard some of the following steps.
Look to a more experienced investor or mentor figure that can argue with things you believe to be true. Think that you should only buy houses? Let them argue why units might be a better choice. Believe in only investing 10km from the CBD? Find a regional investor specializing in small country towns to challenge your thinking.
This may re-affirm your personal perspectives, or cause you to turn the light on yourself early and re-examine why you believe what you do.
- Ask yourself about your ‘loss aversion’
Co-owner and managing director of Wealth Focus, Suliemann Ravell, explains that this is one aspect worth close analysis.
“We hate to acknowledge the loss and will hold on to a bad investment for too long,” he says of human nature and the majority of investors.
There are a number of these ‘human nature’ traps when it comes to investing, as often our primal instincts don’t match up into the best investment decisions.
“The best investment investors in the world are generally those that can distance themselves from behavioural biases,” Mr Ravell explains.
Ask yourself about previous non-property habits – have you played on a roulette table long after losing in the hopes of re-gaining your losses, for instance? This is telling of your personal appetite for loss and your ability to cut those losses.
- Write down your fears
If there aren't many on this list, then you may find that you're not that averse to risk. If there are many, then it may say the opposite. Then write down your property-specific fears, and which steps will bring you to a level of comfort.
Every investor faces risk, and every investor can mitigate their risk by buying wisely, undertaking due diligence and looking to take out insurances. However, does this make you feel more confident about your choices?
- Write down what you ‘know’
After writing down what you think you know about property investing, go and read things and look for arguments to the contrary to help avoid confirmation-bias.
Mr Nicholson also points to a habit called ‘anchoring’. “This is where we fixate on a target or previous trend,” he says. This may be a suburb’s five-year growth.
“We look for trends in everything we do rather than making logical decisions.”
This may also be tied into ‘over-confidence’, he says. This psychological term is one that has been reviewed in many studies and has found time and time again that the lower a person’s level of intelligence or knowledge on a subject, the more ‘over-confident’ that person tends to be about the topic.
At the end of the day, having the right investment mindset is crucial. Every investor is different, both financially and personally, and for this reason it's worth bearing in mind that your investment journey will be individual to you, and subject to your own biases and choices.
- Check out our other articles discussing 'mindset' for even more information.
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