1. Know yourself
Investing basically is less about the markets and more about you. Hence, invest accordingly to your own unique needs and your ability. Needs can be figured out by giving them a serious thought. What about ability? Am I competent enough to invest into mutual funds? Or can I invest directly into stocks? Do I have the skill? Answering questions like this and more similar to the above ones may help to select a particular process to make investment decisions. This would help the solo investor to choose between an aggressive style or defensive style. By looking at the words used, it can be interpreted as aggressive style has more returns than defensive style. This may be right or may be not. The decision to choose between the two should not be depended on expectation of higher returns. It should be depended on what kind of person the solo investor is. For example, if the solo investor can commit a nice portion of time to study business and conduct his own research, aggressive style can be good for the same. If the solo investor does not want to use his valuable time going through lots of texts, annual reports and business data, he can choose the defensive style. If solo investor has emotions in check and can think more rationally, go for aggressive. If you cannot sleep peacefully with your investment decision, go defensive.
2. Investing is not a competition
The Solo Investor manages his own money. He should not be competing with anyone in regards of generating higher returns. Every person’s risk taking ability is unique through which investment decisions are made. Hence a person can generate better returns than others. This can be attributed to many things, his skill, his financial position and most importantly, his luck. Others can try to learn form that person and develop similar skill. Their financial position could also be similar to him but it is almost impossible to have a similar luck. There are many investors who use many differents methods of investing. One reason can be to generate higher returns, but an important reason is that the method works for them. These methods are developed by various unique experiences those investors have had in their respective lives. It is difficult to copy those. Most importantly, in investing business, professional investors have to generate better returns than their peers for various reasons. These reasons can be to keep the clients invested. To attract more clients and more money. They can also receive the pressure to perform from their clients or employers. In short, professional investors need to show the returns to other people. The Solo Investor does not have to do any of that. He is under no pressure to perform and can separate investing and his own personal life. He can also enter into some unconventional positions without needing approval from others. Hence, The Solo Investor should try and manage the risks, improve the investment process and focus less on competing for returns.
3. Set short term and long term goals
One of the most important thing to consider during making an investment decision is what is the time horizon for which we will remain invested. As we know our life is uncertain and anything can happen anytime, so we might not know when we will require the invested money. Even though such events are unpredictable, we can be prepared for it. That is where setting our goals comes into picture. When we set goals for our investment, we get an idea of the time we would remain invested. So if a goal is set which has a period of less than 3 years or similar, we would wish to invest in less volatile and more safe investment options. If a goal is beyond such a short period of time, we can choose investment options which can be volatile. 3 years is just an example, it can be 2 years or 1 year according to the investor. Setting such goals and preparing for the same gives us a big opportunity. It prevents us from being a forced seller. For example, I have invested money in equity mutual fund and during economic downturn I lose my job, I would have no income and have to use some money from my investments. What if the market has also tanked that year, it may be possible that I would have to withdraw my investments when they have negative returns. I won’t even get the amount I had invested and only part of it. Even though I had a vision of 5-6 years to remain invested, due to conditions which are not in my control, I was forced to sell my invested when they should not have been. Preparing goals and acting accordingly might prevent the above scenario.
4. Differentiate between luck and skill
I actually do not have much to contribute in this discussion because there are many other people who are smarter and more intelligent then me on this topic. I would just say what I know here, luck and skill should not be confused with each other. A good decision can give a bad result because of bad luck. A bad decision can give a good result because of a good luck. Confusing the result a 100% outcome of our decision could be very wrong. Even a good decision can give us a bad result. If we do not consider the factor of luck in the outcome, we might change a good decision making process. The more worse situation is, if a result is good despite taking a bad decision without taking luck into consideration, we might keep making bad decisions and the future outcomes would be terrible. Luck does run out sometimes. The best way to deal with such situations is, consider the decision and the result two different things. I read this Annie Duke’s book ‘Thinking in Bets’. Good decisions can create bad outcomes and bad decisions can create good outcomes. Give luck it’s fair share of credit.
Have patience. Investing is an activity which gives result after a substantial amount of time. There can be various things in between which would enable us to change our decisions, but if the process is good, we would come out just fine. Avoid the noise. Be rational in making an investment decision or any decision in life. Don’t follow someone into making a decision because their story is different then ours. Stick to the goal and have fun. Wait for the opportunity, prepare for it and as as soon as it presents itself, grab it. Remember, the solo investor is not managing other people’s money. Hence, he can be patient without giving into the demands of generating returns.