How to Make the Right Financial Decisions
- Tuesday, March 07, 2006
And second, you've educated yourself on the basics. When you're able to give a simple explanation of your strategy to a friend and answer a few questions, you've probably got at least a beginner's grasp. The right investment step is the one where you understand what you're doing, why you're doing it, and how you expect it to improve matters. That's the least you should expect of yourself before making decisions that can dramatically affect your life and the lives of those you love. Sound Mind Investing’s Fund Upgrading and Just-the-Basics portfolios are good examples of effective, yet easily understood, strategies.
• The right investing decision is one that is prudent under the circumstances. Does it pass the "common sense" test? How much of your investing capital can you afford to lose and still have a realistic chance of meeting your financial goals? The investments that offer higher potential returns also carry greater risks of loss. The right portfolio for you is not always the one with the most profit potential.
For example, it's usually best not to have a majority of your investments in a single asset or security. For that reason, people who have large holdings of stock in the company they work for often sell some of it in order to diversify. If the stock doubles after they sell it, does that mean they did the "wrong" thing? No, they did the right thing. After all, the stock could have fallen dramatically as well as risen (ask the former employees of Enron). What would a large loss have done to their retirement planning? The right investment step is the one that protects you in the event of life's occasional worst-case scenarios. Generally, this moves you in the direction of increased diversification.
Many people seem to find investing to be a nerve-racking, if not downright scary, experience. Making investment decisions, and then watching the results unfold, can be stressful. Do you become anxious when circumstances compel you to make important investing decisions? Most of us do to one degree or another. If my mail is any indication, a great degree of financial fretting is common. Three recurring comments lead the list of ways my readers express their concerns.
• "There's so much at stake. I'm afraid I'll make the wrong decision."
• "I don't have much experience. I'm afraid I'll make the wrong decision."
• "My savings aren't making enough now, but if I make a change I'm afraid I'll make the wrong decision."
What is the "wrong" decision, anyway? If you feel a wrong decision is like saying 2+2=5, then you're off track; such thinking implies investing decisions can be made with mathematical certainty. They can't. This doesn't mean the economy and investment markets are completely random, only that you're dealing with probabilities, not certainties and predictable events. Scientists can predict with great accuracy when the next eclipse of the sun will occur decades into the future, yet they can't tell you if the sun will be eclipsed by a thunderstorm and ruin next week's football game.
All of this is actually good news. It means anybody can play. It's like learning to drive a car. After a couple of lessons, you know enough to travel around town if you follow a few basic safety guidelines. After all, you're not trying to qualify for the Indy 500 -- you just want to reach your destination. In the same way, once you understand Sound Mind Investing’s core concepts, you're fairly well equipped for making whatever financial decisions you face.
© Sound Mind Investing
Published since 1990, Sound Mind Investing is America's best-selling financial newsletter written from a biblical perspective. Visit the Sound Mind Investing website.
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