Are you careful or impulsive?
If you make a spur-of-the-moment decision instead of carefully planning your next move, you may end up someplace that you wish you weren’t. This is true in many aspects of life, including investing.
It’s easy to make a decision based on fear of losing money rather than looking at all the facts. Looking at the facts and how they fit into your financial plan can help you avoid making impulsive decisions. Financial professionals, who are removed from the emotional impact of investing, can help you determine your next step calmly and logically.
Financial professionals should encourage their clients 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 determine why you are choosing one over the other. Write down the possible risks and benefits of the investment – and then cross off any emotional factors. 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 act on the investment.
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. To learn more about how behavioral finance can affect your investment portfolio, read the first chapter of Rich As A King: How the Wisdom of Chess Can Make You a Grandmaster of Investing at profile-financial.com/books
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published June 1, 2015. Updated February 2020