IT makes sense for adult employees, seniors, and retirees who have access to extra money at this time of the year to make wise investing decisions.

Are you investing in assets that will give you more money in the future instead of putting all your money in assets that will lose value with time? Now is the time to decipher your needs versus wants. Do you make decisions based on your emotions or logic? A mindset change may be necessary at this time. A long-term mindset will ensure that you don’t overspend this holiday season.

On making important decisions, Nobel Prize-winning psychologist Daniel Kahneman said that you should take advice from someone who likes you “but doesn’t care too much about your feelings”. He opined that you are likely to get sound advice from that individual. Concerning financial decisions, Kahneman believes that people give more consideration to losses than gains. Based on my own experience I agree with his conclusion. In conducting my fact-finding interviews, many individuals were concerned about not losing money. A common question is “Will I lose my principal?”

According to psychologist Kahneman’s Prospect, people are short-sighted and respond instantly and emotionally to changes based on short-term losses and gains. I often encourage people to invest long-term in assets that will increase in value over time and focus on maximising investment gains in the long term. Quite often persons are caught up with short-term investment performance and make decisions accordingly.

Kahneman theorised that people usually focus on the near future and not the distant future. The mindset is preoccupied with potential losses in the future instead of how to create long-term wealth. I find in my career that people’s fear of the unknown future stops them from investing long-term. The CEO of
Facebook once said: “The biggest risk is not taking any risks; in a world that is changing really quickly the only strategy that is guaranteed to fail is not taking risks.”

Every time we spend or invest our money is at risk of inflation. Will our money buy more or less? However, not many people pay enough attention or understand how inflation impacts their lives. This is the reason financial literacy is very important, especially at this time. Inflation results in your money losing purchase power. It is a silent thief. A major risk is to ignore the presence of inflation — the thief in the night. We should invest our money to beat inflation in the future, by earning compound returns for the long term. Stocks are important assets to have in your investment portfolio when returns are compounded over many years or decades. Stocks have proven to beat inflation by providing a compound average rate of return that is higher than the inflation rate over the long term. A financial advisor can assist with designing a diversified portfolio of long-term and short-term assets that will minimise investment risks and maximise returns. For growth to occur, it’s not about avoiding risk but managing the risks and having the right mix of assets to yield the desired results. A diversified portfolio may consist of stocks, bonds, certificates of deposits, repurchase agreements, and real estate. It is, therefore, necessary to understand how each investment works. When investing in the stock market, blue chip companies are the best options. These are reputable and profitable organisations with strong long-term growth prospects.

Investing long-term is not exciting; it can be boring. The stock market is a long-term game. When you invest in stocks, you are buying a small or a large portion of a real business. You are paying for the future earnings of the business. Don’t get distracted by any short-term market volatility. A solid and valuable business doesn’t shut down because it had a year or two of losses as its business fundamentals remain sound. Patience is important when investing for the long term.

Warren Buffet said, “The stock market is a mechanism for transferring wealth from the impatient to the patient.” Buffet started investing at age 11. He is now 94 years old and is still investing in the stock market. He invested in Coca-Cola in 1988 and American Express in 1991. He still has shares in these companies today. These are just two of the stocks/companies that have been through turbulent times in the stock market, but they weathered the storms, and their growth provided phenomenal returns on the stock market for Buffett. He is regarded as the eighth richest man in the world and one of the world’s most successful investors.

It’s not too late for you to have a long-term mindset. It’s the season for Christmas trees. But what investment tree are you planting this Christmas? Again in Warren Buffett’s words: “Someone is sitting in the shade today because someone planted a tree a long time ago.”

Grace G McLean is a financial advisor and retirement specialist at BPM Financial Limited. Contact her at gmclean@bpmfinancial or visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@gmail.com