Would you like to invest in an asset which leads to losses or lower profits than if you had invested your money elsewhere? Would you like to invest in an asset without knowing about the quality of the asset? Would you like to invest all your money in a single asset? Of course, No! However, still we end up making investments in loss making or poor return giving assets or end up investing in a single asset class leading to poor returns solely for the reason that our investment decisions are driven by speculation, poor knowledge of asset class and above all poor financial knowledge.
Speculative Investment: Bad Investment
Every one of us invests. Some of us invest in banks in fixed deposits, some in corporate bonds, some in gold, some in property, and some in equity and so on. However, most of us make investments decisions purely driven by speculation. Hence, more often than not most of our investments are very poor investments resulting into losses or poor ROI making our investments “Bad Investments”.
When we invest in gold, most of the time we purchase in the anticipation of earning profit by selling at higher prices. Similarly when we invest in bank deposits or corporate bond, we have the false notion of security. With the ever increasing rates of inflation and ever decreasing interest rates, most of these investments give low profits raising a question mark over our investment decisions. When we invest in equity, we end up buying a poor stock, or buy a stock at peak prices or sell the stock too early leading either to losses or lower profits than otherwise one could have made again making our investment decisions poor.
How to become a rational investor?
Let us first take a look what rational investors do. Some of big banks, investment funds, wealth management fund and so on are good at making sound and rational investment decisions.
Every big investor be it a bank, investment fund, wealth management fund or a big corporation make their investment after taking into account lot of factors including investment costs, recurring costs, estimated ROI, possible risks among other factors. Hence they do lot of analysis before making any investment.
Now the question arises if all these big investors can base their investment decisions based on research and analysis, why we as small investors cannot make our investment decisions based on research & analysis. One of the first response is these big investors have plenty of resources at their disposal to do such analysis. In fact this is true. We do not have the resources as these big investors have. Secondly it is not in everybody’s capacity to understand the nuances of investment and analysis. Again that is true. However, the more important reason is we have very poor financial knowledge that most of us have not received in any school, college, university or business school. Hence what we do, we make poor financial decisions leading to poor returns on our investments. However, we can make our investment decisions sounder by making them based on research and analysis.
Before making any investment, if we do our due diligence which involve careful gathering of data, checking the reliability of that data and analyzing that data then our investment decisions would be based on careful analysis. If you lack the knowledge to do research, then you should acquire financial knowledge to make such kind of analysis. If you are not capable of analyzing the data yourself then you should take help of some experienced person in the concerned area of investment to make the decision whether your investment would be worth the price or not or worth to make at all. But make sure you make all your investment decisions based on thorough research and analysis and not based merely on speculation.