Define your investment profile by identifying:
1. Your goals and constraints
2. Your risk ability and tolerance
3. Your cognitive biases and their impact on your emotions.
Profiling: everyone is unique
Differences go beyond the level of wealth and stem from:
- 1. Age
- 2. Education
- 3. Phase of life
- 4. Profession
- 5. ...
Financial situation as the core of your profile
1. A very wealthy person with relatively little planned expenses
- Will be able to take considerable investment risk, as you have enough funds aside to absorb potential losses.
- Will be said to have a "high risk ability"
2. A person with limited wealth and a large part of his assets reserved for financial commitments:
- Can only take limited investment risk, as he lacks funds to cover potential losses
- Will be said to have a "low risk ability"
- Saving for retirement
- Providing for children's education
- Purchasing real estate objects
- High for less important objectives
- Low for important objectives
- .... as investments may recover from potential losses
- ..... as investments cannot recover from potential losses.
- Choosing which asset classes / securities are taken into consideration
- Forecasting expecting returns and risk
- You tend to over-invest in local companies (home bias)
- You tend to overweight recent information (recency bias)
- You may be influenced by recent data, which may not be relevant (anchoring bias)
- You tend to be over-confident (overestimating expected returns and / or underestimating risk)
- You tend to look for evidence which will confirm our beliefs and ignore information that contradicts them (confirmation bias)
- You tend to overestimate the value of assets you own and underestimate the value of (similar) assets you do not own (endowment effect)
- You tend to sell winning positions too soon and hold onto losing positions for too long (disposition effect)
- If you answer "yes", then keep the position.
- If you answer "no", then sell it.
- Risk ability and tolerance