Making good investment decisions

Written by Alex

Topics: Investing, Retirement, Taxes

Are you ‘good’ at investing?  What do you base that answer on? Most people unconsciously base their personal view of their investing skills on a few past instances of success or failure, mixed with various cognitive biases like anchoring, selective perception and optimism bias.  So what can a simple human do if they want to be ‘good’ at investing?  Aside from reading books by people who have proved they are good at it, and generally listening to Warren Buffet, here are a few more ideas that I’m pretty sure will serve you well:

Ignore the news media

Along the lines of being a good information filter, remember that the news media exists for one reason, and one reason only:  to SELL news. The daily happenings in the stock market, and endless spouting off by talking head ‘experts’, will not help your investing skills.  In fact it will probably hurt them.

Ignore taxes

Do not make investment decisions based on tax ramifications.  Taxes should always be a consideration, but never the reason.  The classic example is someone who holds a large portion of their investments in their own company stock.  This is an asset allocation problem – too many eggs in one basket, usually the person should diversify.  But after a whole career of working, imagine this stock is worth a lot more than was paid for it, and therefore lots of capital gains taxes need to be paid when it’s sold.  Guess why this person doesn’t want to sell it (to diversify) – they don’t want to pay the taxes!  Wrong decision!

Another currently relevant case for those who have stock options.  Many people may be considering exercising options this year since capital gains tax rates are currently scheduled to increase next year.  As this good article from Fairmark contends, the main issues to consider when exercising options are not taxes – they are value (time vs intrinsic) and diversification.

Sleep on it

Investing is not the realm for quick or rash decision making.  A decision to change your asset allocation, move money into a new fund, add a new asset class, or change the amount you invest should be steeped in reason and careful thought.  Thinking of making a change?  Decide, and then sleep on it.

Make it automatic

Nothing can hurt a good decision more than not acting on it.  If your decision requires any future or repeated action, don’t let your simple human brain derail it.  Use the technology given to you and automate.  Turn on automatic investments.  Turn on automatic savings.  Turn on automatic contribution increases.

Is there anything you’ve done to help yourself make good investment decisions?  Share it in the comments!

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