Don’t Shortcut Your Financial Decisions
All of us make dozens of choices every day. Many of these decisions are made using “shortcuts” or heuristics that enable us to rapidly run through the decision-making matrix without much conscious thought. In our information overloaded world today, an example of a “shortcut” might be using a website such as Trip Advisor or Yelp to help us choose a hotel or a restaurant.
The difficulty with “shortcuts” within the financial decision making realm, is that the distinction between marketing information and actual data may be difficult to discern. Each and every year, investors pile into mutual funds and other investments because the fund appeared on some “Best of the Year” list. Since investing is a forward focused exercise, however, investing in something that performed well for a solitary year in the past is usually a poor choice. What happened last year does not necessarily extrapolate into this year.
Re-framing Your Choices
Decisions start with some type of need…a need to eat a meal; a need to have a place to stay when traveling; or a need to plan for your financial future. From there, you make an information search, consider alternatives and make a decision.
Because of the sheer amount of financial information required to make reasonable investment choices, using the same decision making process for selecting a restaurant or hotel is inadequate for making financial decisions. Immediate past performance is of relatively little importance in a financial planning framework that is looking out 20 or 30 years into the future. Investing, (and indeed ALL financial decisions), should be based on specific, quantifiable goals. Once you tie the “why you invest”, to these goals, the choices are automatically re-framed around those goals. Decision-making becomes much easier and more focused on what matters most to you.
Once you have successfully re-framed financial choices, these choices should be further refined along the aspects of investing that are within your control. What happens in political races, the Federal Reserve policy or the rate of inflation are elements that you cannot control. What you can control are your planning goals; your costs; your overall stocks/bonds allocation; and your behavior.
Shifting your financial decision making process away from being reliant only on recent past performance is an important first step towards winning the financial game of life. Ready to re-frame your financial choice? Ready for a real conversation?