Investment Biases? - There's a Flowchart for That

Posted by John Posey

Have you ever considered investing in a new, intriguing, hot investment idea? Does a new IPO (initial public offering), publicly admired stock or cryptocurrency have you salivating for the next make-money-quick solution? Sounds like a chasing squirrels moment to me, but you can read the Financial Freedom Field Guide for more on that analogy.  Many of us tend to pay attention to what seem like easy money ideas. If only that kind of easy button actually existed in the world of investments yet there’s always plenty out there hustling for it. If you catch yourself contemplating a new investment purchase, here’s a good flowchart to go through before you pull the trigger.  You can get a quick assessment of how your biases may be playing into your thought process before any significant decisions are made.

Conversely, do you own an investment that you would never part ways with? For whatever reason and no matter the performance, you wouldn’t consider selling it? Here’s a flowchart for that too.

I learned of another good assessment on this situation called the Overnight Test. Imagine your beloved asset (either by you or possibly by the person that gave it to you) that you wouldn't consider selling. That asset is gone overnight, but you receive the asset's fair market value in cold hard cash. Maybe it’s a family home or cabin, a stock mom and dad owned forever, or a classic car inherited from a relative to paint a few scenarios. Would you immediately buy it back? If the answer is anything other than a resounding “YES, of course!” you likely have some underlying issues to work through. There’s not anything necessarily wrong with having an attachment to an asset but it’s worth being aware of. There is value in recognizing and understanding the risk tradeoffs you are making.

Happy investing.

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