Three Simple Steps For Managing Your Investments

One of the most common reasons people fail is that they make impulsive decisions. If you make a spur-of-the-moment decision instead of mulling over your next move carefully (i.e., strategically), you may end up someplace that you wish you weren’t. This is true in many aspects of life, including investing.

It’s very easy to make a decision based on fear of loss (loss aversion) or mental accounting (not looking at the whole picture) rather than looking at all the facts. Looking at the facts and how they fit into your financial plan can help you avoid making irrational or impulsive decisions. Often professionals, who are removed from the emotional impact of investing, can help their clients determine their next step calmly and logically.

When considering an investment, make sure your advisor encourages you to take the following three steps:

 

Take a step back

Wait a day before making your final decision. If it’s a worthwhile investment, it will still be here tomorrow. It’s never a good idea to make decisions under pressure.

Ask yourself why

Why do you think this investment is any better than the others? Compare it with similar investments, and make an educated decision why you are investing in this as opposed to other products. Write down the possible risks and benefits of the investment – and then cross off any emotional factors. You should base your decision on facts only. And most importantly, make sure one of the “whys” in selecting the investment is it fits into your financial plans and will help you further your goals.

Present your reasoning

Are you confident enough in your decision to invest in the particular product that you could present your decision-making process to your spouse or to a hypothetical investment committee? If your decision doesn’t sound logical and understandable enough to present to others, you need to think about it some more before you write the check.

Understanding behavioral finance, why investors act the way they do, is an important prerequisite for making wise financial decisions. Better to learn from other people’s mistakes than to fall prey to common financial blunders.