Every investor has a particular perspective on investing. This perspective may be called the investor's investment mindset. An investor’s mindset significantly impacts the results they achieve with their money. This naturally means that it is important for investors to have a mature investment mindset. But what exactly is a mature investment mindset? And what does it take to develop one? These are the questions that I will answer today.
Developing a mature investment mindset requires adherence to six fundamental investment principles. The first of these is to construct a diversified investment portfolio. Mature investors understand that the central objective of investing and personal finance is long term survival. They realise that minimising the downside is more important than maximising the upside. They therefore orient their portfolios to earn moderate but sustainable returns. They do this by having balanced allocations to multiple asset classes in their portfolios. This helps optimise portfolio return while also moderating portfolio risk.
The second principle is to minimise investment costs. Mature investors realise that just as returns compound, so do costs. They realise that complex investment strategies and the services of most professionals involve significant costs. These costs commonly constitute a percentage of the value of the portfolio. Most importantly, they realise that it is extremely hard to beat the market return over the long term. Therefore the costs incurred in such cases cannot be adequately justified. All it does is significantly eat into the investor’s long term returns. These first two principles can be distilled into a golden rule of investing. It is given in the graphic that follows.
The third principle is to accept the assertion and implications of the concept of zero real returns. Mature investors realise that it is extremely hard for the post tax return of any portfolio to beat inflation over the long term. They therefore assume that their portfolios would earn zero real returns over the long term. In other words the long term post tax return earned by the portfolio would be nullified by the inflation experienced by the investor over their lifetime. This gives them a realistic understanding of inflation and the periodic investments required for their goals. I have covered the concept of zero real returns in detail in an earlier article titled Zero Real Returns : Seemingly Zero Logic, Definitely Very Real
The fourth principle is to minimise investment mistakes. Mature investors realise that there are three major kinds of investment mistakes. They avoid all three of them. These mistakes have been listed below :
1. Allocating too much or too little to a single product or asset class
2. Inconsistent investment behaviour
3. Ignorance of investment costs
It is important to remember that mature investors are not immune to making investment mistakes. It only means that they display superior awareness of investment mistakes. This sees them make fewer mistakes than those around them. And when they do make one, they are quick to take corrective action.
The fifth principle is to focus on the broader picture rather than on investment performance. Mature investors constantly focus on big picture questions to assess how well they are doing. They virtually put their portfolios on autopilot using simple, transparent and easy to understand products. The majority of their energy is dedicated to answering broader questions such as the ones mentioned below.
The final principle is to ignore investment myths. Mature investors do not fall prey to various myths and false beliefs that are frequently propogated about investing. They rather look at each such myth they come across with skepticism. They then develop rational perspectives about each myth. Consider a few examples as shown below.
Becoming a mature investor is therefore simple, but not easy. It requires one to go against several widely accepted false notions and beliefs about investing. It demands the ability to block out the noise and focus simply on the facts. But the reward for being able to do this is a significant increase in our chances of achieving the right outcomes with our investments. As a parting thought, take a look at all six principles of being a mature investor listed below.
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