Investor Psychology - Habits: The Habit of being an investor
We tend to want the ‘here and now’ over the gradual but larger offering that comes with time.
A good example of this point is something like winning the lottery. The jackpot prize of say $1 million is the here and now, but most lotteries offer an alternative option which is X amount per month (say $20,000) over a period of 20 years or more. When you do the maths, the second option is the one that is better for the winner, yet majority will take the first.
When it comes to saving and investing, the same issue comes to the fore. Many will chase the here and now option (like chasing Bitcoin mania or buy now pay later stocks) rather than looking at investing in investments that compound and grow their savings in a more steady and certain way with long term results that outperform.
We also tend to convince ourselves that enormous success requires enormous action. Everyone has done this, whether it was trying to lose weight, starting a new venture, winning a contest or any goal for that matter. We as humans will demand of ourselves something exceptional, requiring instant improvement to reach that enormous success.
Except that to be successful, you need to be in the habit of doing the action you want to be successful at for a period of time. You need to make the action a habit.
Forming habits takes time, it takes small, incremental behavioural changes to form.
Think about getting fit. You don’t just walk out your front door and go for a 42 kilometres marathon run on your first day – you need to start small and accumulate your fitness before you can hit the pavement for the full 42 kilometres.
That training, that habit, of going and running a slightly longer distance each time you run builds that fitness you need to reach that marathon goal. That behaviour also creates a structural routine habit – one that you can continue long after your goal as it’s now part of your behaviour.
It is exactly the same for investing. Trying to double your investment immediately by buying a ‘mania’ trend (think of the GameStop mania trade in the US or Blackmores in Australia in 2015) or some ‘new age investing phenomena’ (cryptocurrencies) routinely end one way – significant loss.
Whereas those that invest steadily, that get into the habit of adding to their investment funds, that get into the habit of reinvesting dividends back into their investment fund and know they will reach their goals over the longer term - these people tend to achieve more and achieve that structural goal. But like the running goal, they also develop a structural, routine habit of being a better saver and growing their wealth in a more sustainable way – it then becomes habitual and becomes part of their ongoing behaviour.
If you want to see how the habit of investing through dividend reinvesting and continuous adding to your holdings works over the long term, click on the link to view our ‘build your wealth’ calculator to see how much more you can achieve by being a habitual investor. https://www.investsmart.com.au/what-we-offer/wealth-planning