What Goes Into Making An Investment Decision?

I ask myself this question all the time.  This not only pertains to financial investment decisions, but other life investment decisions as well.  We invest our money, time, energy, and emotions into many things each and every day.  Sometimes it is therapeutic to ask yourself the questions that we answer unconsciously by making split decisions.  Here are some questions you may want to ask yourself before making another big decision about investing your money or time into something.

  1. What is my risk aversion?  Everyone has a different level of risk.  You can figure out the level of risk you are willing to take by evaluating the past decisions that you have made.  Are you a thrill seeker?  Then you probably have a high tolerance for risk.  Do you agonize over which brand of toilet paper to buy?  Then you are probably more conservative when it comes to taking on risk.  You must realize what kind of risk you are willing to take when thinking about investing your money.  This will shape the entire backbone of your investment portfolio.  For young people, my personal opinion is that you should always be more agressive with your investments, because you have plenty of time to ride out the stock market waves.
  2. What are the benefits and consequences of the investment?  You must always evaluate this issue even if it is obvious.  Most financial investments have the benefit of gaining a high return on your money, and the consequence is the risk of losing money on your return.  However, some financial investments require more time to manage, analyze, and maintain.  A venture capitalist may need to be constantly monitoring the performance of the companies he has invested in.  This requires much more time and effort than monitoring the stock of a large corporation unless you trade stocks for a living. 
  3. What are my goals and objectives for this investment?  Your investment needs to have a plan.  Don’t just throw your money in a mutual fund not knowing what your plan is with it.  Figure out if the investment is going to be long term (more than 5 years), mid term (1 – 5 years) or short term (less than 1 year).  This will help you choose what kind of investment product you want to use.  Do you have a specific item or event that you want to use this investment for?  These are all questions that help you figure out the goals and objectives of a financial investment.
  4. What are the alternatives?  In terms of financial investments, you must always ask yourself what else you would be doing with this money if you did not invest it at this time.  This is a very important question to ask.  You should NEVER be investing money when you are having trouble paying your bills!  That just does not make sense.  This goes back to my post about setting your financial priorities.  You must have your financial priorities set before your start investing money.  On the other hand, if investing the money keeps you from buying stuff that you do not need, then you should probably invest it!

These are four questions that I try to internally ask myself before I make a financial investment or an investment of my time, energy, or emotions.  So often we get caught up thinking about where we can get the best return for our money or search for the newest, hottest investment product when we fail to even realize why we are investing the money in the first place.  Hopefully this will help you and I make wiser decisions about life and money. 

  • http://www.forestcotton.blogspot.com/ Jim

    When it comes to stock investing it is and always will be mind over emotions. This is most likely why so many investors fail at stock investing.