Finance Content for FinTechs
Economic Context for Impact Ventures
our 3 w’s
Why FinCoTech?
- We create powerful & positive content that resonates.
- FinCoTech doesn’t just produce content. Instead, we educate, trigger actions and fine-tune decision-making for your target audience.
- We have made it our philosophy only to promote positive, impactful content (i.e. no negative & sensational news content)!
Who does FinCoTech serve?
- We mainly serve FinTechs and Impact Ventures. We fill the content & communication gap and provide strategic guidance and advice.
- Occasionally, we take on projects from companies in the financial sector. B2B only.
What does FinCoTech create?
- In short: Impact content.
- In more detail: Content strategies & topic development, educational articles, research & analyses, website blog fine-tuning, white papers, high-quality editing and translations.
Testimonials, References & More
Some of FinCoTech’s testimonials + relevant references & experiences are listed below.
Nowadays, we focus on collaboration with FinTechs & Impact Ventures.
We have clients and references across various business areas. These include, among others:
- Behavioural Economics & Finance
- Biotechnology
- Financial News & Data
- Capital Markets
- Financial News & Data
- FinTechs
- Impact Ventures
- Journalism
- Online Education
- Marketing and Design + Research.
Financial & Economic Education
FinTech & Behavioural Finance
Tiphaine Saltini
(PhD), CEO @ Neuroprofiler
Biotechnology
David Frank
Co-Founder & CTO @ aquila biolabs GmbH
LONDON SCHOOL OF JOURNALISM
Journalism
ECH DESIGN
Neil Graver
Creative Director for Ech Design (London, UK)
UBIQ Webinars
André Roriz
Sales & Marketing Manager @ UBIQ Webinars
Poynter Institute
College of Media and Publishing
Bloomberg
Information of Founder
For more insight on the founder & content developer of FinCoTech AB, visit the LinkedIn profile (Daniel Jark):
The 3 Qs (A Content Case)
11 Qualities (to master)
- We explore your personal – WHY or Business – WHY
- Find your real reasons for financial freedom and making an impact.
- As T.T. Munger put it: “The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind.”
- The same applies to strategic investing. Smart decisions by means of education & advanced technology can make it easier to get started.
- “We Need to Stay Connected to the Power of Financial Education.” (Kim Kiyosaki)
- Finetune your decision-making process.
- You need to support and believe in your financial decisions. Then you will stick with them and can make a long-lasting impact (for yourself and others).
- No doubt, the integration of smart technology can help you, also with your decision-making process.
- Explore appropriate tech tools & solutions which are suited for your financial strategy and goals.
- Let’s begin with some lyrics from John Mayer: […] I’m dizzy from the shopping mall. I searched for joy, but I bought it all. It doesn’t help the hunger pains…and a thirst I’d have to drown first to ever satiate. […]
- As John Bogle put it: “Investing is not nearly as difficult as it looks. Successful investing involves doing a few things right and avoiding serious mistakes.”
- A thoughtful minimalistic approach and the right choice of tech can help. We tell you how.
- There are two ways to get rich: make more or desire less.
- “It is not the man who has too little, but the man who craves more, that is poor.” (Seneca)
- Whatever you define “being wealthy”, always make sure to remember the following: “Your economic security does not lie in your job; it lies in your own power to produce—to think, to learn, to create, to adapt. That’s true financial independence. It is not having wealth; it’s having the power to produce wealth.” (Stephen Covey)
- “Being rich is having money; being wealthy is having time.” (Margaret Bonnano)
- Financial freedom requires financial independence. Real wealth is about both: freedom & independence.
- Two quotes that say it all:
- “You must gain control over your money or the lack of it will forever control you.” (Dave Ramsey)
- “Money doesn’t buy happiness; neither does poverty” (Joshua Fields Millburn & Ryan Nicodemus)
- In many countries, it is often too easy to access debt. And most of the time, you will have to pay for it (costly). But can you afford it?
- As Thomas Jefferson once put it: “Never spend your money before you have it.”
- Try not to pay expensive interest. Earn it instead.
- Listen to Albert Einstein: “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it.”
- Irrational behaviour patterns cannot be avoided altogether. But their impact can strategically be diminished.
- We examine financial behaviour patterns and biases. And, more importantly, offer solutions.
- “It is good to learn from your mistakes. It is better to learn from other people’s mistakes.” (Warren Buffett)
- No doubt, great losses can be great lessons. But you need to be able to recover and grow.
These 11 Qualities have been used and adapted for various behavioural finance platforms. Are you interested in how to use these principles in your content strategy?
22 Quick efforts (to recall)
1. Resist short-term gains.
- Often small gains are realised far too early.
- Avoiding frequent transaction costs.
- The investor simultaneously gets confirmation that they have done everything properly and there is a sense of security since the invested money is now ‘safely’ stored away in their current account. They of course overlook the fact that they should reinvest this income-generating capital and that any sense of security they may have is transitory at the very least.
In such a fast-changing world, security and confirmation are important and basic human needs. These are reflected in the way many private investors approach the stock market, especially during particularly unstable times or in weak phases of the stock market when many investors lean toward maintaining or securing gains that have already been made. The simplest method of doing this is through the sale of security positions that are in the plus, even if only insignificantly.
As a result, even small gains are realized far too early. As with lottery or casino winnings, the brain releases dopamine which leads to feelings of happiness. The investor simultaneously gets confirmation that they have done everything properly, and there is a sense of security since the invested money is now ‘safely’ stored away in their current account. They, of course, often overlook the fact that they should reinvest this income-generating capital and that any sense of security they may have is temporary at the very least.
Investors should be aware of these relationships and retain any current positions which are positive until the target price they originally set (or fair value) is achieved. Of course, this only applies as long as the title in question does not move into the red on the basis of proper assessment (such as fundamental analysis).
You should also make yourself aware that frequent redistribution should in no way be thought of as a proactive investment technique, even if there are suggestions to the contrary from any consultancy firms or asset management companies you may have commissioned. And this does not even take into account the transaction costs that are incurred as a result of buying and selling continuously.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]2. Limit your losses.
- Often poor investment are often held onto for far too long.
- Divesting oneself of a losing position can be regarded as a defeat (it is not).
- “The battle is not lost until I surrender.”
- If a 50% decrease has occurred; it will need to double in value. There are some investors who still hold out hope for improvement at losses of 90%. But, cross your heart: is it really possible to speculate on price gains of 900%?
As I have just described, with small gains, the risk is that they will be gathered in often too quickly. On the other hand, poor investments (those in the red) are often held onto for far too long, which may result in enormous asset losses. This, again, is mostly due to psychology.
Ultimately, divesting oneself of a losing position can be regarded as a defeat that is only recognized once the losses are realized, and the opportunity to recover has been lost. “The battle is not lost until I surrender”, generals and investors alike are prone to thinking in this way, which causes losses to stack up.
That said, you should remember that a position that is 10% in the red needs to increase by at least 11% to reach its original level. If a share price has dropped by 20%, it needs to increase by 25% to ensure no losses have been incurred. If a 50% decrease has occurred, it will need to double in value (which means it must go up 100% again).
There are even some investors who still hold out hope for improvement at losses of 90%. But cross your heart: is it really possible to speculate on price gains of 900%? This is the performance increase required to reach the original level of the security’s price.
To avoid getting into such a position, investment decisions concerning securities that fall (considerably) into negative territory should be checked especially carefully. Where there is doubt, the parachute cord should be pulled before it is too late.
Most of the large price losses which exceed those of the overall market actually have a very sustainable foothold, which remains untapped by the investors in question. In such instances, a terrifying end is preferable to never-ending terror – a rule which investors in shares would be wise to follow.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]3. Forget about the purchase price.
- Many investors place too much emphasis on the purchase price of their investments.
- The price originally paid does not play any role in the future price or income that can be achieved from a security.
- The only factor on which a decision to sell or retain a position should be based is the expected trends in prices (and fundamental factors), except of course if there are personal reasons for requiring cash.
Many investors place too much emphasis on the purchase price of their investments.
Apart from a poor performance which leads to the realization of minor gains and the resulting reluctance to let go of losing positions, this ‘strategy’ also leads to a continuous worsening of the quality of one’s portfolio as the risks mount up.
Winners understand “give and take”. Losers cannot let go. As the number of sitting ducks increases, more and more capital is locked away, which could be put to better use in lower risk and/or higher-yielding securities.
To avoid joining this trend, it is wise to make the price paid at purchase the last thing on your mind.
The price originally paid does not play any role in the future price or income that can be achieved from a security. The only factor on which a decision to sell or retain a position should be based on is the expected trends in prices, except of course if there are personal reasons for requiring cash.
If you (for instance) are planning on a medium-term price target of €80 from a current price of €50, it does not matter whether you bought that share at €45 or €55. The original purchase price is also irrelevant if your circumstances have changed and you need to sell.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]4. Avoid following the crowd into fashionable investment choices.
- Never underestimate the way Dollar signs in people’s eyes can stop them from seeing clearly.
- Greed, a certain level of euphoria and the fear of missing out on certain ‘guaranteed’ growth can easily lead to speculative bubbles, which either burst all of a sudden or start running low on air at the very least.
Never underestimate the way Dollar signs in people’s eyes can stop them from seeing clearly – this is where careful asset management is vital. This applies to every type of investment – be it shares, bonds or alternative investments such as property.
Once the word has gotten out that a particular security, sector, industry or even an entire investment class is a hot ticket, and investors are willing to invest practically any amount of money into it because they expect the price to go through the roof, it is essential to keep your distance and sell (quietly).
Greed, a certain level of excitement and the fear of missing out on certain growth can easily lead to speculative bubbles which either burst suddenly or start running low on air at the very least.
This often-irrational behaviour has been observed not just in recent years but even centuries ago. Let’s have a look at an interesting and extreme fashionable investment choice example in the past:
The most extreme example of an overinflated market must be the tulip speculation in Holland (Netherlands) almost 400 years ago. Originally exotic luxury goods imported from Central Asia, tulips became increasingly popular around the start of the 17th century, taking particular pride of place in the front gardens of the well-heeled. Once demand started to grow around 1630, and the bulbs became ever more expensive, a lucrative trade arose, and florists throughout the country started to cash in.
Their initial cautious investment yielded such high profits that they searched high and low for more supply to ensure they did not miss out on the roaring trade. Those who could went into debt or even mortgaged their houses. Craftsmen sold their looms and their tools. For some tulip specimens, it was not unheard of for prices to double or triple within a week alone.
A total of 10,000 guilders was paid for the most famous of all tulips, ‘ Semper Augustus’, in January 1637, which corresponded to 30 times the average wage of a craftsman. To this day, it is not known for certain what triggered the crash, but it will essentially have involved a loss of trust on the part of some traders present on the market.
People stopped bidding on offers and trade ground to a halt. Payments were not made on future contracts, and the entire credit market disintegrated. This did not only entail localized economic losses; the whole Dutch economy was thrown into turmoil.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]5. Don’t let a negative prevailing mood sway your thinking.
- Panicking about major downturns in the market is just as dangerous as being swept away by excitement and greed.
- Even ‘stressed’ market phases can produce remarkable opportunities.
- Overall, it can be said that it is never wise to prematurely redistribute your portfolio on the basis of the latest fad (be it positive or negative) – doing so can significantly hinder your portfolio performance.
Panicking about major downturns in the market is just as dangerous as being swept away by excitement and greed.
The same also applies to completely excluding sectors that are currently out of favour. Even ‘stressed’ market phases can produce remarkable opportunities – high demand will be met with low supply, causing prices to rise and interest to grow in those particular assets.
However, this sort of investment strategy requires patience, discipline, and resilience.
In some cases, you may have to wait a long time for other investors to start drawing the same conclusions and for that asset to grow in popularity. However, as always, your chosen position may hit a downward trend, opposite to your expectations.
Overall, it can be said that it is never wise to prematurely redistribute your portfolio on the basis of the latest trend or mania (be it positive or negative). Doing so can significantly hinder your portfolio performance.
Being swayed by the latest trend can often lead to very unbalanced portfolios. You should ALWAYS have good reasons for investing or divesting and think long and hard before following the crowd into an unwise investment decision.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]6. Never invest in ‘surefire’ tips.
- You are sure to have friends, neighbours or supposed financial consultants who have recommended shares, precious metals or equity investments that ‘cannot fail’ and are guaranteed to produce high profits.
- The more tempting the odds, the higher the risk in general.
- It may well be the case that the chance-risk ratio can be optimized by intensive and expert comparison of the various investment options, as well as ensuring the widest possible capital distribution, but the laws of the capital market cannot be taken out of the equation.
You can be almost certain to have friends, neighbours or supposed financial consultants who have recommended shares, precious metals, or other equity investments that ‘cannot fail’ and are guaranteed to produce high profits.
However, succeeding with your invested capital requires you to ignore such recommendations, even if everyone else is adamant they are onto a winner. As asset managers, our clients often come to us with recommendations from third parties. After years of evaluating such recommendations, our results have shown that such investments and models often lead to catastrophic losses, even if they are not fraudulent by nature.
In many cases, continuing to follow such recommendations even resulted in a total loss of invested capital.
Logically, we must ask ourselves a question: why was the person giving a tip in possession of information which was not available to other investors higher up the chain? There are two plausible explanations. She or he either possesses insider information, which is often illegal to exploit, or the tip-giver (or people associated with them) has deliberately set up a system to fleece unsuspecting investors of their money in a fraudulent manner.
The recommendation will only pay out for those who initiated the scheme and their helpers. You also need to ask yourself: Why is someone who has knowledge of such a fantastic investment (doubling or even multiplying your invested capital) willing to pass it on to other people and me? The ‘adviser’ may well be running the scheme with their own money or cash from their close contacts.
The more tempting the odds, the higher the risk in general. It may well be the case that the chance-risk ratio can be optimized by intensive and expert comparison of the various investment options, as well as ensuring the widest possible capital distribution, but the laws of the capital market cannot be taken out of the equation.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]7. Avoid creating portfolios which are too one-sided.
- Losses can never be excluded even if you make your choices very cautiously.
- Diversification is key. However, effective diversification only.
- From a historical perspective, it is also worth noting that it is very rare for there to be phases in which almost every asset class performs badly.
Every investment has its good times and bad times. Losses can never be excluded even if you make your choices very cautiously, which is why your investment portfolio should be effectively diversified. This will help avoid all-out panic if some of your securities, or even a whole segment, start to head southwards.
From a historical perspective, it is also worth noting that it is very rare for there to be periods in which almost every asset class performs badly. Most investors can offset losses in one area with good performance in other areas, and in fortunate cases, the gains from one area more than compensate for any losses incurred.
Even in 2008, the year the global financial crisis raised its head, and many markets slipped into the red to a considerable extent, there were some assets (for example, bonds from developing countries and gold) that escaped this trend and would have been welcome additions to increase the stability and diversification of portfolios. In 2013, it was the established equity markets that achieved good results, while bonds and commodities started to show their weak side.
The diversification effect is considerably stronger if the correlation between the price trends of the affected securities or asset classes is only minor. This is because weaker correlations mean the individual investments will not all react in the same way to the specific factors at play. The various regions (Europe, USA, Asia, Africa, et cetera) are now better-synchronized thanks to goods and financial markets around the world being more interconnected: A process which has picked up pace over the past few decades.
However, this means that the old strategy of reducing risk simply through diversifying one’s portfolio with international shares and government bonds is now far less effective. This cannot be stressed enough: effective diversification, ideally over several asset classes, is much more important today than it has been in the past if you wish to prevent losses in price caused by market fluctuations.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]8. Avoid investing cyclically.
- Positive market trends make people act carelessly and willing to ignore increasingly obvious signs that the market is about to take a downturn.
- The situation is entirely reversed when it comes to markets which are already on the way out – they persuade private investors to divest themselves of more and more of their positions due to fear of further losses.
- Both eventualities lead to a very cyclical investing mentality.
Portfolios featuring a higher proportion of shares produce better results over the long term than those which include a lower percentage of shares. However, such investors must be prepared for higher volatility.
If you look at the results from hundreds of portfolios and assess their effectiveness, each type of portfolio from the ‘classic categories’ (exclusively fixed-interest securities, more conservative and balanced investments, through to dynamic investments mostly constituted of shares) produces an average performance outcome.
The more dynamic the investment, the better the performance results. Of course, there are portfolios in every investment class which perform better than others, and some which are far below average when compared with similar portfolios.
Interestingly, we have observed that for many of the portfolios which performed poorly, several changes in strategy took place at the wrong times. This means that a private investor successively increases the proportion of shares in their portfolio during good stock market periods, only to have a very high proportion of shares at the end of a boom, which is in stark contrast to that individual’s risk mentality.
Positive market trends make people act carelessly and willing to ignore increasingly obvious signs that the market is about to take a downturn.
The situation is entirely reversed when it comes to markets that are already on the way out – they persuade private investors to divest themselves of more and more of their positions due to fear of further losses.
Both eventualities lead to a very cyclical investing mentality. The result is that the portfolio is severely lacking in risky securities at the end of a weak period, and then, once markets experience an upturn and those divested securities have regained in price, the portfolio cannot hold its weight.
This ensures sub-optimal return results and a highly fluctuating risk profile. Targeted adjustments will be needed to combat these issues.
To achieve this and to trick your “investing mind” into functioning in a more productive way, it would be wise to assign a specific proportion of your portfolio to each asset class in accordance with how willing you are to take risks.
If the ratio of shares should be 50%, for example, redistribution should be carried out if this ratio increases to 55% or 60% of your total portfolio. The same applies vice-versa if this ratio has reduced to 40-45%. In doing so, investors will only be buying as prices are dropping and, all other things being equal, at a more favourable valuation.
And then, as prices become overinflated, they can dispose of a share of their equity securities. Such an approach is anti-cyclical in nature and still ensures that portfolio risk remains at the same level, give or take a little for small fluctuations.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]9. Stay ready for action with good liquidity management.
- Investors who are always completely invested do not have any room for maneuver during periods of undervaluation and therefore miss out on favorable buying opportunities.
- Some investors become incredibly nervous if there is still some residual liquidity in their portfolios because they (quite rightly) recognize that this liquidity will not lead to a positive return.
- Make sure to have an appropriate investment horizon.
Some investors become incredibly nervous if there is still some residual liquidity in their portfolios because they (quite rightly) recognize that this liquidity will not lead to a positive return.
However, it is worth bearing in mind that markets can fluctuate significantly over longer periods of time and will feature assets that are either over or undervalued at various times.
Investors who are always entirely invested do not have any room for moving funds during periods of undervaluation and, therefore, often miss out on favourable buying opportunities.
For instance, if investors during the 2008 & 2009 financial crisis had employed good liquidity management, they would not have been left feeling helpless and would have been able to react more appropriately by setting up their portfolios for some very profitable years to come on the equity and bond markets.
It is therefore always important to leave yourself some space for movement, whatever the situation.
That said, this guideline does not certainly entail keeping cash on hand – the goal of always being able to react flexibly can also be realized via revenue-generating ‘liquidity’, such as corporate bonds with short maturities or dividend-generating stocks.
However, an important reminder at this stage: When moving into the market with available liquidity, always make sure you do have an appropriate investment horizon.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]10. The index is not the be all and end all.
- Now, answer honestly for yourself: are you really content when your asset manager wipes 30% off your asset holdings within a year and then tries to convince you it is positive simply because the S&P500 (or any other index benchmark) fell by 32% over the same period? Or, put another way: are you disappointed if you ‘only’ earn 15% over 12 months while the most important stock market barometer has recorded gains of 18%?
- The answers given to these questions should make it very clear where the problem lies.
- Avoid benchmark hugging.
Now, try to answer honestly: are you really content when your asset manager wipes 30% off your asset holdings within a year and then tries to convince you it is positive simply because the benchmark index (for example, the S&P500) fell by 32% over the same period?
Or, put another way: are you disappointed if you ‘only’ earn 15% over 12 months while the most relevant stock market barometer has recorded gains of 18%?
The answers given to these questions should make it very clear where the problem lies.
Many investors, both professionals and private individuals, decide on a benchmark and try and match it as precisely as possible. In the case of fund managers and performance-driven investors, so-called ‘benchmark hugging’ is generally attributable to anxiety about having to justify the investment decisions they have made.
Those who stick rigidly to the index will not be fired because the returns they achieved (excluding any costs) were not below average. Additionally, unpleasant meetings with clients can be avoided and simply referring to the parlour state of the market is enough to put an end to any constructive reflection.
Ignoring for a moment the tremendous losses that can result from such a lazy and careless investment ‘concept’, there is another problem: prices which experienced good upward trends in the past are too highly weighted in their benchmarks and investment portfolios. When making investment decisions, it is the future that is key, not the past.
When putting together a portfolio, it is, therefore, wise to pay little or no attention to market indices but instead, specifically, acquire the assets which offer the best potential for future returns at a reasonable risk level.
Taking such an approach makes it possible to exclusively invest in securities that have been chosen on the basis of careful analysis without ever feeling compelled to hold onto something simply because it forms part of a set benchmark.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]11. Do not trust the historical performance of large investment fund companies.
- More than 95% of actively managed funds do not manage to hit their set benchmark over the long-term; they generally trail behind, sometimes to a considerable extent.
- Many banks and asset managers with a large portfolio of funds systematically divest themselves of the assets which are no longer in their top group.
- Bear in mind: Funds can be closed, and the track record vanishes.
Many private investors who ask me to run a portfolio assessment claim their investment funds are achieving above average results. It may well be the case that historical performance has been very favourable, but, sooner or later, prices will start to fall considerably, which will be followed by a longer period in which the respective fund only ever performs below average. The reasons for this are manifold.
More than 95% of actively managed funds do not manage to hit their set benchmark over the long term; they generally trail behind, sometimes to a considerable extent. Despite this, many such companies exclusively offer funds that are amongst the top-performing in their class.
Private investors then incorrectly conclude that these investment fund companies are doing extremely well and are offering their clients the best possible performance. In reality, however, this is not the case by a long shot.
Many banks and asset managers with a large portfolio of funds systematically divest themselves of the assets which are no longer in their top group. This helps banish their weaker products from the rankings. It is often the case that several special assets from one class featuring various investment approaches are all brought together, only for the weaker positions to be blended with the current best performers. This enables them to claim that they are still hitting their historical benchmark.
Furthermore, if a fund performs well, it is generally thanks to the head fund manager and their own analysis and investment style. From a statistical point of view, however, fund managers switch jobs every three to five years to take on new duties or receive a higher salary from a different employer. Their predecessor is then frequently incapable of achieving the same results, despite often having the same resources and expertise at their disposal.
However, when it comes to small- and medium-sized asset management firms and investment boutiques, the situation can be different. On the one hand, funds are dissolved much more frequently, and on the other, the individual managers are often held more personally responsible for their particular investment style, including the success or failure of the product in question.
As a result, they are much more motivated to achieve good performance and keep the funds they manage going. Closer collaboration with clients and the much more personal working atmosphere offered by many smaller to medium-sized companies also mean that individual fund managers often stay with the company for a longer period on average. This applies even more if the founder or owner of the investment firm takes direct responsibility for the performance of their funds.
If you wish to achieve good results from fund investments, it is important that you personally understand the market and form an opinion about which segments promise the best outlook. These are often not the same segments that performed well in the past.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]12. Endlessly collecting information is not the key to success.
- In today’s world, it is extremely easy to collect inordinate amounts of information, which does not necessarily make the assessment of potential investment options any more effective.
- Data analysis should instead be based on a simple analytical framework to ensure clear conclusions can be drawn.
- Also have a detailed look at choice paralysis: investors who collect (nearly) every shred of information from the wealth of data available in the modern era will never make an investment decision and will thus never realize any returns.
In today’s world, it is extremely easy to collect an excessive amount of information, which does not necessarily make the assessment of potential investment options any more effective.
Data analysis should instead be based on a simple analytical framework to ensure clear conclusions can be drawn. For example, when evaluating various asset classes, it is easiest to simply focus on returns and growth prospects.
If the investment is overvalued and the expected returns are correspondingly low, there is a high probability of pricing ratios worsening at a specific point in time, and the security in question can lose value as a result, which can then lead to the expected returns increasing once again. This principle also applies in reverse.
It is also recommended for you to disregard as far as possible any disruptive factors from other market participants. This will help investors avoid being drawn in by fashionable investments instead of holding on to the basic principles of valuing investments.
The reason for the high losses experienced by dotcom investors (in the year 2000) was neglecting simple evaluation methods, such as cash flow analyses etc.
The key to successfully investing in securities will always be selecting sensibly and evaluating relevant company figures, irrespective of how much information is floating around the Internet and being endorsed by new forms of media concerning that company.
There is also another argument for reducing informational input when evaluating assets which may seem somewhat more intuitive: investors who collect (nearly) every shred of information from the wealth of data available in the modern era will never make an investment decision and will thus never realize any returns.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]13. Don’t sell yourself short.
- Many private investors do not like being involved in financial investments and instead delegate this task to a family member, bank or an asset management firm.
- It is important to have a basic knowledge and understanding of the various investment options, even if delegating responsibility in full to a third party.
Many private investors do not like being involved in financial investments and instead delegate this task to a family member, bank or an asset management firm, for example.
There is nothing unacceptable about this. However, when evaluating portfolios, we have made one clear observation. This is that portfolios from investors who are lacking in a basic understanding of the equity and bond markets often perform much worse, even if the responsibility for managing them has been delegated to a specialist third party.
This can generally be explained by either incorrect instructions being given (e.g. “my invested capital must not be at risk”) or the bank or asset management firm is exploiting the ignorance of their clients to their advantage. This can occur through investments being targeted towards products that achieve the highest earnings for the asset manager.
In some banks, for example, there are sales targets for certain products which can be pushed on clients without the advisor – more accurately: salesperson – having to worry about receiving a critical response from clients.
It is therefore important to have a basic knowledge and understanding of the various investment options, even if delegating responsibility in full to a third party. Of course, there is no point in trying to learn to such an extent that you would be in a position to make that specific investment decision yourself. It is generally sufficient if you are able to evaluate the results generated and check whether the advisor’s approach seems plausible. This approach is also essential if you want to develop your investment strategy in conjunction with your asset manager and to prevent any misconceptions and unpleasant surprises.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]14. Don’t pin the blame on others.
- While good investments are mostly attributed to one’s own forecasting and analytical skills, the ‘blame’ for bad decisions is all too often ascribed to external events or other market participants.
- Also have a look at overconfidence.
Excessive self-confidence is a common human trait. For instance, in a survey carried out by the Swedish psychologist Ola Swenson, 93% of the American drivers interviewed claimed to be above-average drivers.
This natural tendency to be overly convinced about one’s capabilities is fatal for investors. This is because it leads to decisions being made based on insufficient information, forecasts being overestimated, or labouring under the delusion that you, the investor, are not the one at fault. After all, you are simply doing what generations of investors have done before you.
While good investments are mostly attributed to one’s own forecasting and analytical skills, the ‘blame’ for bad decisions is all too often ascribed to external events or other market participants. Other speculators are simply too silly to properly comprehend the potential of a particular company, management is making the wrong decisions, market sentiment is not going in the direction it should be, nobody could have predicted a specific turn of events … and the list goes on…
This type of attitude also hinders investors from critically reflecting on less-than-ideal investments and from subsequently applying the lessons learnt to their future investments. A significant amount of time should be spent reflecting on this, and not with a view to finding a guilty party or collecting supposed evidence that the decisions taken would ultimately have been correct, despite the (high) losses incurred.
Now, we are having a look at some typical psychological pitfalls (often so-called “biases”) for private investors.
Finance is and has always been an extremely vast and complicated field with many points of discussion. One topic often discussed is behavioral patterns regarding financial decision making, as human emotion can be a significant factor in investing or personal finance.
While there are endless types of human tendencies, we will touch on only a few that are likely to be prevalent in today’s environment. Emotions and temperament are often just as important as analysis and intelligence. As already noted by Warren Buffett, “a successful investment does not necessarily correlate with the investor’s intelligence”. What is commonly needed is the ability to systematically control greed, fear and other drives and inclinations.
Let’s get started. You will see that some of these biases are directly connected with the above-mentioned points.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]15. Avoiding overconfidence.
- Whether it’s a board game or a financial position, overconfidence can show its tendencies anywhere.
- If you find that you are executing financial plans with overconfidence, take a step back and try to get a wider perspective.
- To avoid a negative impact of overconfidence, stay alert and understand outcomes and variables that could impact your current financial state.
Whether it’s a board game or a financial position, overconfidence can show its tendencies anywhere. Arguably one of the most common financial behaviors, this can cause you to lose out on gained benefits or future rewards.
Overconfidence is when an individual overstates their ability to handle tasks or execute a financial plan. A similar mindset is someone who tells an exaggerated fishing story and believes it himself.
If you find that you are executing financial plans with overconfidence, take a step back and try to get a wider perspective. To avoid a negative impact of overconfidence, stay alert and understand outcomes and variables that could impact your current financial state. Another way to avoid this conflict is to establish an accountability partner.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]16. Loss aversion and disposition effect.
- Loss aversion can be powerful in finance as it can cause people to minimize their risk tolerance levels, thus ultimately diminishing alpha, the excess return over the benchmark.
- Losses have a larger emotional impact than gains.
- To avoid this behavior, ensure you have a proper risk tolerance in place and if you sustain losses or have issues with a plan, implement a predetermined level as which you’ll abandon when you are suffering losses, or your plan seems to fail.
- The disposition effect refers to our tendency to prematurely sell assets that have made financial gains, while holding on to assets that are losing money. We are driven to sell our winning investments in order to ensure a profit, but are averse to selling losing investments in hopes of turning them into gains.
Loss aversion can be powerful in finance as it can cause people to minimize their risk tolerance levels, thus ultimately diminishing alpha, the excess return over the benchmark. This behaviour is based on the psychological fact that losses have a larger emotional impact than gains, causing you to avoid either taking a position or not following through with a financial plan.
While this mindset, based on the idea of scarcity, is persistent, you can avoid its consequences by having a proper plan in place. Following your plan will eliminate many of the distractions associated with investing, including loss aversion behaviour.
If you have been in finance for any length of time, then you are likely familiar with the so-called disposition effect. This type of behaviour occurs when an individual takes gains on trades or realizes the benefits of a financial plan while holding on to losses or the negative aspect of a plan.
To avoid this behaviour, ensure you have a proper risk tolerance in place and if you sustain losses or have issues with a plan, implement a predetermined level as which you’ll abandon when you are suffering losses or your plan seems to fail.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]17. Anchoring bias.
- Anchoring is common among retail investors and individuals new to the market. Anchoring is when you have an attachment to an opinion on a particular investment or financial topic that may or may not have logical value.
- To avoid anchoring, take time to understand impactful information and use that in your research process.
Anchoring is common among retail investors and individuals new to the market.
Anchoring is when you have an attachment to an opinion on a particular investment or financial topic that may or may not have logical value. For example, you saw that a company came out with a new product; therefore, the stock must increase.
This type of thinking is also common in trading when individuals hold on to losing trades, thinking they must become profitable because of varying reasons. To avoid anchoring, take time to understand impactful information and use that in your research process.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]18. Herd behavior and trend chasing bias.
- The growing use of financial technology has also led some financial experts and gurus to stimulate herd behavior or trend-chasing.
- To avoid these behaviors, it’s important to take the time to research why a trend or a certain group behavior is occurring. The observance of due diligence is a must in finance, eliminating potential risks in various financial activities.
The growing use of financial technology has also led some financial experts and gurus to stimulate so-called herd behaviour or trend-chasing. Herd behavior or trend-chasing is when an individual follows the ideology of a group of people or takes time to follow a particular trend. While the two terms may be used interchangeably, trend-chasing is associated more with trading and investing.
To avoid these behaviors, it is essential to take the time to research why a trend or certain group behavior is occurring. The observance of due diligence is a must in finance, eliminating potential risks in various financial activities.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]19. Fear of investing and fear of missing out.
- Fear of investing can be summed up by hesitation at the thought of losing your investment in the marketplace. The fear of investment can lead to people hesitating and missing out on the opportunity to make a profit which ultimately affect their retirement provision.
- Even more damaging for successful investments is the fear of missing out. Comparison is part of human nature.
- Implementing a strategic investment plan can help mitigate some of the effects of those natural human emotions.
Thanks to social media, this behaviour has been brought to the forefront and applied to many areas of life. Fear of investing can be summed up by hesitation at the thought of losing your investment in the marketplace.
The fear of investment can lead to people hesitating and missing out on the opportunity to make a profit which ultimately (among other things) can affect their retirement provision. In finance, in order to generate a profit, you will always have to take some level of risk.
Even more damaging for successful investments is the fear of missing out. Comparison is part of human nature. We compare with others what we have, what we do, what we look like, and where we live.
The habit of comparing affects people on a deep emotional level and puts a considerable strain on their behavior. It plants the seeds of fear in their minds that they might miss something. In today’s world, investment opportunities are endless, and investing is so easy. You can simply invest via an app on your mobile or participate in dubious crypto-currency speculations via various websites and online platforms. Implementing a strategic investment plan can help mitigate some of the effects of those natural human emotions.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]20. Choice paralysis.
- Thanks to the growth of financial technology and products, our options are near limitless.
- Also known as analysis paralysis, choice paralysis is when an individual spends too much time understanding and reviewing the many choices pertaining to current needs.
- It is more about understanding your specific needs and goals than the hundreds of potential choices.
Last on our list of behaviors commonly exhibited in finance is choice paralysis. Thanks to the growth of financial technology and products, our options are near limitless. If there is an investment or methodology you desire, then there is likely a product out there.
Also known as analysis paralysis, choice paralysis is when an individual spends too much time understanding and reviewing the many choices pertaining to current needs.
While this can be difficult to overcome, you can minimize this behavior by limiting the time you spend analyzing dozens of different financial products in the market. It is more about understanding your specific needs and goals than the hundreds of potential choices.
Is it easier to make a decision when you have two or ten choices? Whether menu, tracklist or extensive wardrobe, the luxury of a wider choice can often result in indecisiveness.
Choosing from several options can, in fact, lead to better decisions but may also slow you down.
Choice paralysis arises when investors are faced with an overload of information. How can I tell which investment is best? Choice paralysis means inactivity and delays a possible increase in value for your investment.
To avoid the risk of choice paralysis, a trusted financial advisor can be consulted who can provide a brief list of the best options available. Existing in-depth market knowledge and industry experience enable you to assess bad or even good but not great investments for your specific needs. Ideally, the result is a curated list of exceptional investment opportunities. Tailored to give you the best possible foundation to start building assets today, rather than wondering tomorrow whether you have made the right choices.
The following two quick efforts are exceptionally important. Make sure to recall these frequently.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]21. Compound interest + periodic deposits.
- Compounding interest: “He who understands it, earns it; he who doesn’t, pays it.”
- The amount of compound interest depends on the following variables. Firstly, the initial assets that you invest at the beginning. Secondly, the amount and frequency of further payments (so-called savings instalments or periodic deposits). Thirdly, the investment horizon, i.e. how long you invest your initial assets and savings instalments. And fourthly, the interest rate (or the return) you receive.
- The compound interest effect is commonly dramatically underestimated.
Albert Einstein called compound interest the eighth wonder of the world: “He who understands it, earns it; he who doesn’t, pays it.”
Compound interest will let you earn interest on your interest. While you have to work for the money you initially invest, from then on, your money works for you.
If you add periodic deposits (monthly, quarterly, or annual savings) to your investments and choose to reinvest all interest earned systematically, you achieve superior results.
Numbers demonstrate this better than words. Let us have a look at three practical examples:
No compound interest, no periodic deposits:
Initial capital: 10k EUR
Interest rate/ return: 9 % per annum
Running time: 25 years
Compound interest: No
Interest during the year: Linear
Deposits: No deposits.
Final capital: 32.5k EUR
Compound interest, but no periodic deposits:
Initial capital: 10k EUR
Interest rate/ return: 9 % per annum
Running time: 25 years
Compound interest: Yes, interest accrual.
Interest during the year: Linear
Deposits: No deposits.
Final capital: ca. 86k EUR
Compound interest & periodic deposits:
Initial capital: 10k EUR
Interest rate/ return: 9 % per annum
Running time: 25 years
Compound interest: Yes, interest accrual.
Interest during the year: Linear
Deposits: 1k EUR monthly.
Final capital: ca. 1.15 Mio. EUR
Additional insight (compounding interest): How to make money work for you?
The difference between linear and exponential growth: 4 plus 4 equals 8, and 4 more equals 12. That’s linear. 4 times 4 gives 16, and multiplied by 4 again gives 64. That is exponential, exponentiated, a multiple.
This simple example shows very clearly how large the numbers become through exponential multiplication. Einstein has therefore also been credited with the quote that compound interest is the greatest mathematical invention of human thought. Even though it is now considered proven that this is only an attribution after his death, this does not change its powerful leverage.
The compound interest effect is the basis for making money work for you. But how does it work exactly? Interest is a percentage calculated amount that increases the interest-bearing sum (assets as well as debts) after a certain term. Since assets or debts increase as a result of the interest calculation, the percentage interest refers to a larger sum when the interest is next calculated. The interest credit or interest burden, therefore, increases annually. Compound interest, therefore, arises from the fact that you receive interest on the previous year’s interest in the following year if you directly reinvest the interest received.
The compound interest effect then leads to the assets doubling after a certain time and later growing exponentially – due to the interest payments. By the way, the compound interest effect is called that, but it does not only work with fixed-interest investments. Because income from shares (i.e. dividends) also generates additional income for you in subsequent years if you reinvest in shares directly after distribution. Money makes money.
Attention: the compound interest effect plays against you with debts. Debt makes more debt if you do not make repayments (current interest payments and/or redemptions).
What influences compound interest? The amount of compound interest depends on the following variables. Firstly, the initial assets that you invest at the beginning. Secondly, the amount and frequency of further payments (so-called savings instalments or periodic deposits). Thirdly, the investment horizon, i.e. how long you invest your initial assets and savings instalments. And fourthly, the interest rate (or the return) you receive.
Therefore, the following three principles apply to the compound interest effect, each separately and all together. Your wealth grows the more…:
I. …larger your initial wealth is.
II. …longer you invest.
III. …higher the interest rate is.
With the “rule of 72”, you can estimate how long it will take for your starting assets to double. Let’s assume you earn a return of 9% per year on your initial assets. This corresponds roughly to the average return of the world stock market (MSCI World) over the last decades. How long does it take for your initial assets to double? The rule of 72 says: divide 72 by the interest rate in percent. In our example, your assets will have doubled after about 8 years (=72/9) due to the compound interest effect.
How to use the compound interest effect for your retirement provision? When you save assets for retirement, it is important that they grow with compound interest and that you reinvest the interest payments or dividend distributions immediately. Only then you fully benefit from the compound interest effect on it. Because annual inflation (depreciation of money) also leads to an exponential loss of purchasing power, quasi as a counterpart to the compound interest effect. So if you want to maintain and increase the purchasing power of your assets, you also have to increase this exponentially via compound interest, since even with an interest rate significantly above the inflation rate, the real value of your remaining assets will decrease in the long run.
A practical example: Dan and Max save money for their pension.
The compound interest effect is commonly dramatically underestimated. That is why we look at the example of Philipp (25) and Daniel (45). Both start saving money for old-age provision.
TDan has to save 3x more: Dan has ca. 20 years left until retirement, Max ca. 40 years. Let’s assume that both save the same amount each month and have the same starting balance. In the end, Max will have saved three times more than Dan. If Dan wants to achieve the same amount of assets as Max despite a later start at the age of 65, he must put aside three times more than Max every month. The application of principle 2 shows how important it is to start saving for old age early.
Max becomes a millionaire: Let’s look at another calculation using Max as an example. If he invests the maximum amount of EUR 6,768 (as of 2018) in securities each year with a starting balance of EUR 6,768 and earns the historical average interest rate of the world stock market (MSCI World adjusted for inflation), he will be a EUR millionaire after 35 years. That is, already five years before the current average retirement age. He has only paid in just under a quarter – the remaining three quarters are compound interest.
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]22. Have a systematic investment plan.
- Most important, a saving plan should always be a systematic approach, including a suitable long-term investment strategy.
- Take your time and understand your personal needs (readjust/ rebalance if necessary). There should be no room for random and emotional short-term investing when it comes to establishing a sustainable saving plan for your future.
- The terms saving and investing should be used analogously from now on.
When it comes to saving or investing, people tend to have different definitions. Most important, a saving plan should always be a systematic approach, including a suitable long-term investment strategy.
There should be no room for random and emotional short-term investing when it comes to establishing a sustainable saving plan for your future. Most of all, it is essential to take your time to make a detailed plan as early as possible. You should also make sure the chosen investment strategy is in line with your individual needs and adjust or rebalance your asset allocation if necessary.
We have summarized some five essential “Dos and Don’ts” each when it comes to saving plans:
Dos:
1. Start saving early and invest with a systematic approach.
2. Stick to long-term goals, and create a cash cushion for unforeseen events..
3. Repay your loans, reduce recurring expenses, and start benefiting from compound interest instead.
4. Automate or schedule your savings.
5. Stay diversified and review your portfolio if necessary.
Don’ts:
1. Do not try to time the market.
2. Do not fail to consider inflation and the actual loss of purchasing power over time.
3. Do not underestimate the length of retirement.
4. Do not make salary your only source of income, and never underestimate the cost of living.
5. Do not panic-sell or make other emotional investment decisions.
Unfortunately, we see that most people have not saved nearly enough for retirement and miss out on the benefits of compound interest and investment income.
The terms saving and investing should be used analogously from now on.
Get in touch if you need a systematic investment plan tailored to your needs:
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We cover everything from A to Z – from “AAA investments & Abnormal returns” … to “Z bonds & Zero-beta portfolios” […]33 Quotes (to live by)
1
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“The goal isn’t more money. The goal is living life on your terms.”
Chris Brogan
2
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“The moment you make passive income and portfolio income a part of your life, your life will change. Those words will become flesh.”
Robert Kiyosaki
3
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“Working because you want to, not because you have to is financial freedom.”
Tony Robbins
4
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“Do not save what is left after spending, but spend what is left after saving.”
Warren Buffett
5
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“Easy payments, easy lease, easy approval. Debt is very easy to get into, but makes it hard to live victoriously.”
Bradley Vinson
6
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“An investment in knowledge pays the best interest.”
Benjamin Franklin
7
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“I don’t believe in spending money lavishly, now that I’m making money.”
Ansel Elgort
8
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“A good plan violently executed now is better than a perfect plan executed next week.”
George S Patton
9
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“The secret to financial freedom is making sure to pay yourself first and then make it automatic.”
Dave Ramsey
10
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“Whenever you find yourself on the side of the majority, it is time to pause and reflect.”
Mark Twain
11
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“It is never too early to encourage long-term savings.”
Ron Lewis
Quotes aren’t just words. Quotes ought to trigger actions and, more important, decision-making.
So move forward, and decide today:
- Take action, and provide educational finance content with powerful influence.
- Take action, finetune existing subject areas, and trigger positive behavioural change
- Take action, and build a systematic content calendar for your website or blog.
- Take action, and provide educational finance content with powerful influence.
- Take action, communicate effectively, and initiate subsequent actions inside your target audience.
contact
fincotech@outlook.com
FinCoTech AB
Daniel Jark
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