Do you think you have the right mentality to invest in shares?
It's not easy to stay fully focused about investing in shares. Volatility can make you think things that you wouldn't normally think.
The share market is a great invention. It allows people to buy or sell shares five days a week at the click of a button. There's always going to be different buyers and different sellers in the market for different reasons, which is why the share price can change so much in relatively short periods of time. Some people see this as a positive, whereas other don't like the rapidly changing price.
That's why it's best to adopt the mentality that the share market is there to give you options to buy or sell, rather than dictating to you about what to do. Would you buy or sell your house if it went up or down 10% in a week? Probably not! But we see that type of movement from shares like Afterpay Touch Group Ltd (ASX: APT) all the time.
Think about this, would you rather:
Have a 100% chance of receiving $500 or a 50% chance of winning $1,000.
Whilst I can't talk for everyone, a lot of people would choose the guaranteed $500.
Now, would you rather have a 50% chance of losing $1,000 or 100% chance of losing $500?
A lot of people would go for the 50% chance of losing $1,000 in the hope that they don't lose anything.
Even though the two scenarios are similar, lots of people would prefer to mitigate the chance of losing any money and win a smaller amount, rather than have a good chance of winning a higher amount of money.
I think that's a very interesting conundrum and a good example of how we as humans are wired to avoid loss. Thousands of years ago avoiding danger was a useful skill, choosing a high-risk choice could have meant becoming an animal's lunch. But these days it could mean losing out on investment returns.
Foolish takeaway
Obviously there's more to it than simply saying "go for the high-risk choice". There are valuations to consider, investment objectives and so on. I'm very happy to have lower-risk options like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) as part of my portfolio as well as higher-growth options like MFF Capital Investments Ltd (ASX: MFF).
Just remember that over the long-term it pays to take some risk, even if it makes you a bit uncomfortable compared to just holding cash.
