I heard this saying for the first time in the movie “The Preacher’s Wife”, starring Denzel Washington and Whitney Houston.
I do not know what happens to us when we have cash on us. It is as if it burns a hole in our pockets. For this reason, all financial advisors insist that one prepares the budget before receiving the cash. The same rationale applies to investment.
The reason I shared the document on risk tolerance at the beginning of the investment series is exactly the same. Investments decisions are hugely affected by our psychological state at the time the decision is made. To remove the emotional aspect when making investments, we need to have the strategy cast in stone before you actually commit to the investment.
Take the stock exchange. When one buys shares it is most likely because they heard or saw the company they are investing in made profits or is paying out high dividends. A few months later, the value of the share in the stock exchange falls for whatever reason and you feel like you made a bad investment. Or the value of the stock increases and you decide to hold the stock to see if maybe the value will keep increasing a little more before you sell.
Share value falls: The knee jerk reaction is to sell your shareholding before the value falls even further. However, this is the exact opposite reaction you should have as an investor. The only way you will stick it out is if you have an investment strategy. Before making the investment, you need to set your limits.
For example, I would like to make a 30% profit on this share and then I will sell. Or I will hold the share until I make 100% profit etc. And when you achieve your goal, please sell and get out. The stock exchange investors are not rational and the information is always old news. When you are buying a share, most likely you are basing your decision on the information of the company’s performance in the past year and not what is happening currently. The problem of holding on to a share after you have met your objective is that nobody can predict how the prices will go. You may refuse to sell when you make 100% and then two days/week/months/years later, the price falls even further and now you are facing a loss on your investment.
You will never know the best time to jump ship. The only way to mitigate this risk and your natural instincts in order to stick to the plan is to have the plan before the market starts fluctuating. The same applies to budgeting.
You should budget before the salary is in your account otherwise you go cash crazy. Do a little research on people that win the lottery spend their winnings. It comes and goes very quickly. When the money is almost finished, they start looking for ways to save or invest. At that point, they do not even have enough to live on. And probably have large debts because credit card companies will always increase your upper limit when it seems you have a lot of money to spend.
Now you know. Budget in advance and prepare an investment strategy/plan in advance as well.
Author of this article, Susan Nyakiamo is a personal finance coach, email: firstname.lastname@example.org.