Investment
How We Can Be More Intelligent Investors
There's much for an investor to think about in making decisions. Too much. An overabundance of investment information and methodologies often leads to decisions that are not optimal for the investor.
As we learn from experience or from seasoned investors, we begin to weigh the available information and methodologies in more intelligent ways. Then we can be more successful as investors and progress more rapidly towards our financial goals.
This article includes some statements made by investors, what they indicate about the investor's thought processes, and our suggestions on making more intelligent decisions.
That stock is worth less than when I bought it. I'll sell it when it recovers.
People often hold onto a failed investment far too long, thus missing opportunities for better investments, because we tend to feel the pain of a financial loss more acutely than the joy of a gain.
An investor who thinks about purchase price is focusing on the past performance of the investment. As advisors, we use our knowledge of past market cycles and current economic trends to explain our expectations of future performance. We can't change the past, but we can work to improve the investor's future.
I've lost thousands of dollars on that investment. I can't afford to lose any money.
People tend to think about each investment separately rather than as a part of a total portfolio. In addition, they sometimes focus on the amount of wealth they have rather than on their ability to cover expenses or achieve other financial goals. We counsel our clients that better investment decisions arise from a broad financial view.
That fund has been down for two years. Why would I want to invest in something that is losing money?
Humans naturally assume that current conditions will continue. Knowledge and discipline is required to anticipate cycles and to operate in an environment where random events determine results.
For example, during 2002 bond prices reached historical highs and many analysts found that some stocks were available for purchase at attractive prices. These signs of the end of a cycle led us to maintain stock holdings or increase them for our clients.
I can't believe I bought that crummy stock. I should have known it was overpriced and ready to tank.
Investors can rarely recreate the mental context in which earlier decisions were made. We can remind our clients about issues that affected those decisions but are now almost forgotten. In this way, everyone can see that decisions had a certain logic and that no one should feel blame or embarrassment that decisions didn't work out as hoped. No investor experiences gains 100% of the time.
As unique individuals, we each have different tendencies to fall into various mental traps. Avoiding them can allow much greater investment success, as well as greater comfort with the often stressful activity of investing.
At Pleasanton Financial Advisors, we can help some clients be better investors simply by acknowledging the difficulties that we all feel to some extent and by explaining the reasons for taking actions that seem illogical.
Other clients want to limit the time they spend on investment activities and delegate to us the authority to make investment decisions. Our unemotional, disciplined approach on those decisions can lead to a successful advisory relationship.