Episode 009 - Newtons Three Laws of eMotional Investing

Hello Again!

I have found investing or starting to invest quite easy, I have also observed that even people who don't have any experience in Investments have found it a bit easy to start these day. Technology has played a big role in this and investment companies have also democratised investing - making it relatively easy for people to start with little to no minimums required. However, all good stories always start positive, and then there's a big BUT. Unfortunately, the "but" on this one is STAYING invested. As an investor, you are more likely to reach your investment goals by staying invested, avoiding to make any short term emotional changes.

Pretending to be Clever

One of the most notable phrases in the investment world is "it's time in the market, not timing the market" - think about that for a second (not too long, it's not that deep) before you continue reading. It's terrible to see your investments be on the negative - but you must always keep in mind that you need to weather the storm in order to bluh bluh bluh right [Yes, I am a Eminem fan, he loves doing this on his lyrics but you'd get what he meant]. Moving right along!

Now for some Science, sorry Finance

Sir Isaac Newton is & was a very famous man - in today's terms he would be "trending" every time he put out a paper in the late 1600s. His famous three laws describing the relations between the forces acting on a body and the motion of the body have got nothing to do with money - but I would like us to discuss investing for the long term while we get our Physics on. Ohh I can see the nerd in you jumping up and down for this! By the way, Isaac Newton was a big investor in Bonds back in the early 1700s - and he unfortunately made an emotional investment decision that cost him millions. In other words, even the greatest mathematician can make investment mistakes - so don't feel bad, just learn from your mistakes on your investment journey.

Newton’s first law: the law of inertia

How do you relate your investment portfolio to inertia. If you don't know what inertia is, try riding a motorcycle at 200km/h and hit a wall - let me me know what happens to your body. That's inertia! Funny, because there's an actual investment term called "Investor Inertia". You have a couple of options when you're an investor (or trying to be one); either you do nothing, not invest, or you keep deliberating your decisions. It is not until you actually do something, you then move from point A to B. Unfortunately one of the biggest drivers of investment decisions is fear; fear to lose your money & just being a failure in your decisions. Fear drives people to try time the market (remember the phrase? - so it actually was deep) and this makes them bad investors. The other issue is the procrastination part - "I will start tomorrow" is your enemy in everything, unless its 23H59 obviously! Unfortunately there is always an opportunity cost when it comes to your investments. If you invest in a risky asset like an equity ETF, you simply cannot be panicking next week when you see your investment down -0.78%. In investing, you need goals and once that is clear to you - then you will take off the emotions that come with the rollercoaster of investing. Practice patience!

Newton’s second law: F = ma

Simply put, this law just says larger items (m = mass) require a larger force (F) to actually get them moving. Also, this means that if there's no acceleration (a), then there is no force. Pay attention! This means that your decision making needs to be balanced, at all times - again reducing any of your emotional decisions. In your journey of investment you need to start somewhere right, but you need to keep pumping into your pot & be consistent. This then builds your money (m) or capital invested. While doing so, you need to learn about Risk (which you can take as the "a" in this instance) and how it affects the growth of your money. Unfortunately, risk goes two ways - as there is a risk-reward relationship. If you would like to accelerate your investments that means you want to take more risky assets, then you need to be in for the long term. There will be times where you would like to decelerate a bit, for example when you are close to retirement you definitely don't want all your investment to be in risky assets like commodities. All in all, the outcome of your portfolio value is controlled by how much you put in and how long (time in the market) - and obviously considering all the risks involved.

Newton’s third law: the law of action and reaction

This is perhaps the most easiest of them all. If you don't start (action) your investment journey then nothing will happen (reaction). If you are always trying to rebalance your portfolio more frequently than you should, there will also be consequences. The law states that when two bodies interact, they apply forces to one another that are equal in magnitude and opposite in direction - so when you're busy reading this blog while walking, the wall you will hit applies an equal force, sending you on the floor in pain!

You need to be careful with your hard earned money - you cannot react to every single thing you see and you most certainly must be careful in locking in your losses when you sell because your investment are underperforming. Fortunately for you, if your action is to invest in risky assets and you do this for the long term, the risk and reward thing comes in, you get rewarded over the long term.

In summary; your investment goals should determine your allocation to what you want in your portfolio and same as the first law, your decision making will be the one that changes the trajectory of the outcome. Short term investment changes are usually not a great idea.

The outcome of you investment is influenced by how much risk you take based on your goals, how much you push into your investment pot and time in the market - not timing the market. To every action you do on your portfolio, there will always be a reaction.

I hope you enjoyed reading this, and if you hated Physics at school - then I am apologise dearly!

Signing off!

SiyaTheETFguy