Strategies for success: narrow your investment choices, manage your mood, bet strong when others are weak. Obviously, it's a bit more complicated than that. Read on for the full explanation.
“Logic is a systematic method of coming to the wrong conclusion with confidence.”
We think we make decisions rationally and to our greatest benefit. Still, they don’t always turn out so well; mental barriers get in the way. Some of these blocks, however, are easy to circumvent. It’s all about awareness...well, that and some action steps can improve financial choices and make them more profitable going forward.
Less really is more - for choice, not returns!
Too many choices often lead to confusion and bewilderment on the part of the person making the investment decision. Our brains can only take so much loading of new material. The original experiments that demonstrated this involved jams and jellies at a grocery store. When more of the sweet things were offered, fewer were chosen. This same concept has also been demonstrated with pension options. In other words, more options can lead to inability to make a selection, or worse, making a choice just to finish the process.
What you can do: If you are flooded with investment choices, ask for a different approach from the source. Request that the salesperson or advisor select several options that are best for you and our circumstances. These should be sent to you in writing with the reasons each suits your needs as well as any downside. Why the others have been excluded should be included. Then, selection for you is easier and the person who presents the options bears some of the responsibility, as he should since he is getting paid.
Although optimism does not improve investment decision making, sadness won’t help either. Think of a recent widow who consigns her valuable art to a small local auction house to sell after her husband dies. Her return is unlikely to be as healthy from bidding of the local population as the worldwide network of a major auction house like Christie or Sotheby’s. When depressed or deeply sad, investment decisions are always better delayed.
What you can do: If you don’t feel like performing your usual activities or do them with disinterest, see a doctor who can help. Only after appropriate therapy and reversal to your norm, can you adequately make important financial decisions that will affect you the rest of your life.
Immediate versus future appeal
Just like saving today can make more money for tomorrow, thinking long term rather than short term investing can glean more ultimately. Though, it is only human nature to want to make money quickly, the chance of doing it on a sustained basis is near zero for the ordinary investor. This is demonstrated by the fact that day traders lose their shirts, up to 90% of the time. In addition, most people who trade less than day traders, but still by and sell frequently only eat up their accounts with the trading expense. They don’t make money.
What you can do: Bet strong when others are weak. Resist, resist, resist. If need be, give up CNBC. Even ignore the stock section of the paper. The market news is up and down. Science shows us that only the tried and true works long term: asset allocation and diversification. We don’t do it because it is boring. But, maybe we should get a life that doesn’t revolve around the stock market?