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Psychology is a branch of science studying mental processes and motives. One of the most common motives we live with is that of fear and the most common fear in the investment world is losing your money.
We need to safeguard against losing any of it and we therefore need to place our trust and funds in the hands of a capable investment "shrink" or adviser.
We tend to be overwhelmed by the availability of information, yet we just cannot seem to get enough of it. Money and the process of multiplying it is a common interest worldwide. We tend to invest in anything and everything in order to create wealth.
An important part of investing is for us to be assisted in making calculated decisions, have an in-depth understanding of our portfolios and identify how to realise our financial goals.
Without some form of strategy this exercise becomes impossible.
In constructing a portfolio we must identify the difference between value and growth assets, coupled with the inherent risk. Then ask: "How much am I willing to risk in order to gain financially?"
Part of determining investment risk lies in the time horizon and we must have a clear indication of what our short, medium and long-term needs are.
Another area of risk analysis lies in the vehicles utilised. In constructing a portfolio, we need balance. And the need for diversification is vital. We must spread our portfolios over different asset classes.
Another dimension of investing is purchasing. We all strive to be shrewd purchasers, that is, to buy cheap and look for value. But, as investors we tend to lose sight of value for money because we are driven by market hype, which leads us to "buy expensive".
One of the vital aspects of investor psychology lies in servicing. Advisers must understand investors' wants and needs in order to consistently monitor a portfolio. It is imperative to discusses our portfolio with our financial adviser to assess any change in circumstances. This will enable the adviser to fine tune or realign the portfolio on an ongoing basis.
Without this it becomes a guessing game and you will lose sight, focus and money.
A financial advisor needs to have knowledge, be transparent and understand the psychology behind investment decisions.
Make sure you as the investor can trust and confide in your financial "shrink".
l Bryan Hirsch is a director of Pioneer Financial Planning. Visit www.pioneer.co.za