We are but human!!! This applies to investment too.

In my last blog, we looked into what kind of investor you are and slightly touched on some errors Link. Now it is time to see how our minds play with us and affect our decision making as well as look into judgment errors/biases. In investment management, there is traditional finance theory, which assumes that all individuals act rationally and is opposed by behaviour finance. As there is a large quantity of information available online around traditional finance and it is not very applicable in real life, we will spend most of the time talking about behavioural finance.

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Part 1

Bounded Rationality

As you know life is not perfect, we will never be in a position where we know everything about the entity/investment or able to process all available information in the market. Our next subject is based on this idea.

Bounded rationality is looking into individuals decision making with incomplete information. When we start looking into stocks, we will need to make a huge amount of research to be comfortable with investment. However, eventually, we come to the point, where additional information does not help us to make a better investment decision, and it is entirely okay. So you have to satisfy yourself with what you have. Of course, if you feel that there is more fundamental information that needs to be researched, please, do so. Some examples could be that you have reviewed market, company fundamentals, and all directors. However, you cannot get information about inside changes in the business. If you are happy with your research and feel confident about the company’s future prospect, you can invest without knowing this additional info. The decision will not be optimal in traditional finance sense, but acceptable. You should make sure that the price is right as well and you leave some room for error, but we will speak in future blogs about stock selection. Continue reading →

The practical way to create investment Portfolio!

Here we go my first blog, where I will be providing some useful information on how to start investing! We will touch on bonds, stocks and exchange traded products. This particular Blog will be very efficient and practical. Multiple subjects will be mentioned without expanding for now. Thought I will prepare linked blogs to expand these.

So shall we make some investment! What will we need to create our first investment portfolio?!?

Ingredient 1: Savings:

No way around it. You need to start saving. You cannot invest safely without any initial capital, even if this is just minimal. If you have any debt, you should pay it back first as debt is outflow with certainty in your life. Make sure you have sufficient cash flow after paying your debt & other expenses. When all is considered you start saving and can start allocating residual to your investment portfolio.

So how much cash flow we will need to start? Well as little as £20 pounds a month will do in the beginning. However, more you save higher your portfolio in the future as all powerful cumulative interest will kick in. Also, your transaction cost will be the lower percentage of the overall portfolio.  I would recommend saving anywhere from few hundreds (100,200 etc.) to few thousands a month.

Simple example on Cumulative interest rate:

Save £20 a month with the annual return of 5%, time period 5 years.

>>> After five-year:  Portfolio Value £1,385.79, Profit  £185.79.

Save £500 a month with the annual return of 5%, time period 5 years.

>>> After five-year: Portfolio Value £34,644.72, Profit £4,644.72.

Ingredient 2: Portfolio allocation decision: Continue reading →