Should investing be about the investor, or should it be about the investments themselves? When I look at the kind of investment questions that people ask--on the internet generally, and on Value Research Online, I can see both attitudes.
Let me explain by giving two examples. Here's one real question from an investor: 'Is it advisable to invest in mid-cap and small-cap mutual funds at the current situation of the stock market? How long will the conditions remain favourable for such funds?' Sounds like a perfectly reasonable question and a typical example of what is asked and answered in investing forums. To see the problem with it, sample this one: 'I am 40 years old but haven't started saving for retirement, apart from the EPF deduction. When I retire, I will need Rs 75,000 a month....', and then there are personal details that I'll omit here.
Now you see what I'm talking about? While these are just questions that the two savers asked in an email to Value Research, I think it would reflect their attitude to thinking about investment in general. The first questioner thinks investing decisions are to be based on what's happening in the outside world while the second one sees saving and investing as a way to find solutions to the problems of his/her own life.
It's quite obvious that unless you are a rich person who is just playing around with fun money, the second approach is the right one. The first thing that an investor must do (and keep doing on a continuous basis) is to 'Know Thyself'. The reason for this is there is no investment that can be judged to be the right one without knowing who it is for and for what does the investor need it. There are great mutual funds and stocks which could be completely unsuitable for certain types of investors and for meeting certain types of financial goals. Note that I'm saying an investment can't be judged to be the right one without knowing more about the saver's life. However, it can certainly be judged to be the wrong one--there are a lot of investments that are always unsuitable for everyone, but we'll talk about those later.
Conventionally, the first step in knowing yourself from a saving point of view is to decide your financial goals, decide the time frame in which those goals have to be met, and decide the flexibility of those time frames if any, and overlay a certain amount tax-awareness on top of these goals. Then, for each type of financial goal, one can work out which type of investment is needed. Once that is done, one can decide the specific investments within each type.
Therefore, the first step is always to analyse your own life. Then come the goals, and then follows the type of investment. There are other aspects apart from the goals. How stable is your income, and your spouse's? How's your health? Do you have any older dependents? Do you have any inheritance? And so on. Believe me--knowing whether small cap stocks are going to be 'hot or not' over the next six months is utterly unrelated to the things that are the real inputs to your life's savings and investment decisions.
There's another, even deeper aspect that requires you to know yourself. Different people seem programmed (if that's the word) to suffer different amounts of stress and anxiety when they are invested in asset types that are volatile. This is partly a function of experience--of having been invested through a volatile period and then seen recovery. Investment advisors are fond of asking their clients their 'risk tolerance' but the answers are useless unless someone has had a real life experience of facing losses. This is equivalent to many other life situations. Are you going to be brave when faced with a terror attack? No one knows the true answer till it happens.