When it comes to investing, some believe they have a knack for choosing good investments. But what exactly is that knack based on? The choices we make with our assets can be strongly influenced by factors (most of which are emotional) that we may not even be aware of. The following is a list of some factors that may influence how we invest:
Deal Du Jour
You’ve heard the whispers that the “next greatest thing” is out there, and you can get on board, but you must hurry. Does this sound familiar? The prospect of being on the ground floor of the next big thing can be thrilling. But while great new opportunities do exist, there is also potential for those “hot new investments” to go south quickly. Jumping on board without all the information can be a bit like gambling in Las Vegas – the payoff could be huge but so could the loss. A shrewd investor will turn away from spur-of-the-moment trends and seek out solid, proven investments with consistent returns.
Many people claim not to be risk-takers but that isn’t always the case. There are investors out there who are not reluctant to take a risk but are reluctant to accept a loss. Yes, there’s a difference. The first step is to establish what constitutes an acceptable risk by determining how much you are willing to lose. The second step is to think of the final outcome. If taking risks could help you retire five years sooner, would you take it? What if the loss involved working an extra ten years before retiring – is it still a risk you are comfortable taking? By weighing both the potential gain and the potential loss while keeping your final goals in mind, you can more wisely assess what constitutes an acceptable risk.
The Crystal Ball Approach
Some investors attempt to predict the future based on the past. While history can repeat itself, this is not always the case. Just because the latest “hot” stock rose yesterday, this does not mean it will continue going up. Some investors know this but ignore it in favor of hunches. Instead of stock picking, you can exercise a little caution and seek out investments with the potential for consistent returns.
The Gut-Driven Investor
Some investors tend to pull out of investments the moment they lose money and invest again when they feel driven to do so. While they may do some research, they are ultimately acting on impulse. This method of investing can potentially result in huge losses.
Investors may alter their investing style when major changes such as changing relationships, high debt, or death occur. They begin to second guess their long-term plans and begin investing in the short-term. As the old adage goes – if it ain’t broke, don’t fix it. By enlisting the assistance of a qualified financial professional (and relying on their skill and experience) you can be sure that investment decisions are based on facts and made to suit your long-term objectives rather than your personal, changing emotions or short-term needs.
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