You Can Rationalize Any Investment/Decision!

After many conversations with all kinds of investors. From aggressive to very conservative. I have found that everyone has a different way of looking at things going on around us. We are not wired correctly to be disciplined investors, but rather continue to search for reason s to invest in different ways.

English: Crowd gathering on Wall Street after ...
English: Crowd gathering on Wall Street after the stock market crash of October 1929. (Photo credit: Wikipedia)

I just read an article by Jim Parker called “Seven Ways to Fool Yourself”. I thought I would share. Only you can tell which are relevant to you.

  1. “Everyone could see that market crash coming” Have you noticed how people become experts after the fact? But if “everyone” could see a correction coming, why wasn’t “everyone” profiting from it? You don’t need forecasts.
  2. “I only invest in ‘blue-chip’ companies. People often gravitate to the familiar and to shares they see as solid. But a company’s profile and whether or not it is a good investment are not necessarily correlated. Better to diversify.
  3. “I’m waiting for more certainty.” The emotions triggered by volatility are understandable, but acting on those emotions can be counterproductive. Uncertainty goes with investing. Historically, long-term discipline has been rewarded.
  4. “I know about this industry so I’m going to buy the stock.” People often assume that success in investment requires a specialist’s knowledge of a sector. But that information is usually already in the price. Trust the market instead.
  5. “It was still a good call, but no one saw it coming.” Isn’t that the point? You can rationalize a stock-specific bet as much as you like, but events or external influences can conspire against you. Spread your risk instead.
  6. “I’m going to restrict my portfolio to the strongest economies.” If an economy performs strongly, that will no doubt be reflected in stock prices. What moves prices is news. And news relates to the unexpected. So work with the market.
  7. “OK, it was a bad idea, but I don’t want to sell at a loss.” We can put too much faith in individual stocks, and holding onto a losing bet can mean missing opportunities elsewhere. Portfolio structure affects performance.

All seven points reflect the thoughts of many different investors. Which are relevant to you?

I believe the answer to all seven, to be a successful investor…Long term is to follow these three simple rules:

  • Own equities and high quality short term fixed income.
  • Globally diversify.
  • Rebalance.

This seems easy but very difficult to do because we allow one or all seven of the above points to sway our decisions, short term. To reach our long term financial goals we will need the assistance of an investor coach/fiduciary adviser.

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