The biggest difference between professional and retail investors isn’t how they access markets, or even what they invest in. It’s how they make decisions. Your success as an offshore investor relies on your ability to make intelligent, not emotional, choices.
Most investors understand the power of diversification and compounding when investing globally. So why is it that even though we know what we should do in principle, we struggle to implement it in practice?
The answer lies in the way our brains are wired. Scientists estimate that 95% of our decisions are made using an instinctive thought process, nicknamed the ‘lizard brain.’ We only tend to engage our logical, rational mind when we have to deal with complexity, strategy and the future – and even then, it takes effort to shift from our default mode of thinking.
The curse of the retail investor: Starting strategically and ending emotionally
Most investors can and do think strategically at the outset of an investment journey. In theory, we understand what is the right thing to do is. It’s what happens once we are invested that turns a good strategy into a bad experience.
Because we are programmed to react to negative news immediately and emotionally, we don’t think strategically when we feel threatened. We react emotionally. And for most people, seeing the value of their wealth fall is both threatening and worrying. This response is completely natural, and virtually unavoidable.
The problem isn’t how we react, it's what happens if we then choose to act on our emotions. While professional investors allow emotions caused by short-term negative news to subside before making any decisions, retail investors are often triggered into action when they see bad news.
And here’s the thing: making emotionally driven decisions in the rational world of investments generally leads to terrible outcomes. We can’t solve long-term strategic problems – like our financial future – by thinking emotionally and using short-term data.
This time it’s different’: the four most dangerous words in investments
Successful investors understand that short-term newsflow isn’t what determines long-term success. What determines success are multi-year investment cycles and trends that continue for decades. And harnessing these trends is only possible by investing with a long-term strategy, and sticking with it – even during times of volatility.
The problem with newsflow is that it’s designed to target our emotions and hijack our decision-making. News makes us think that our strategy is no longer valid, and we need to change everything based on something. News makes us think ‘this time it’s different’.
Long-term investment is based on principles and trends that have been remarkably stable. Acting against the status quo – betting that ‘it’s different this time’ – is a very bad choice, statistically speaking. Yet our emotions prefer us to act because of the potential cost of inaction. So retail investors act on their emotional impulses based on short-term data – and miss out on the long-term trends that power the returns which provide financial freedom.
What all journeys have in common
You wouldn’t change your route to work – or even abandon it – because of a red light. Red lights are inevitable on long enough journeys, and panicking doesn't make lights turn green quicker; it just makes your experience more unpleasant.
All journeys have ups and downs, and investments are no exception. There will be periods of growth when everything goes your way. But conversely, because of the cyclical nature of investment markets, setbacks are inevitable when pursuing long-term goals. It's how we deal with these periods of adversity – and the negative newsflow they create – which determines success when investing offshore.
Becoming a successful offshore investor
Mastering your emotions doesn't mean denying them: emotions are how we experience existence. Investing offshore successfully requires us to reflect rationally before making permanent changes to a long-term strategy based on short-term news. Studies show that making irreversible decisions based on emotions – rather than logic – is perhaps the biggest threat to your long-term success as an investor.
If you want help ensuring your investment strategy stays on track, the surest way is to leverage the expertise of a financial adviser. Advisers help keep people rational in times of turmoil. They can be objective about your wealth in a way that is impossible for you – given how emotionally charged the subject of money is for each of us.
So think carefully and rationally – and all the best in your journey to becoming a financially savvy and successful offshore investor!
This article is not financial advice. Please consult with a financial adviser for financial advice.
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