Eliminating biases from your investment decisions can be extremely challenging. Almost by definition, biases are practically invisible to the person that holds them. The best approach is a systematic examination of each investment decision.
A checklist is the ideal solution.
Use the following checklist before finalizing any investment decisions:
__ Am I basing my investment decision on accurate premises? In anchoring, investors are using information that’s inaccurate or irrelevant on which to base a decision. Do you have a sound foundation regarding your investment?
__ Is my opinion accurate regarding my success with this type of investment? Some of us tend to remember our successes better than our failures. View your past history as accurately as possible.
__ Did I go into this investment seeking the truth or did I attempt to confirm what I already believed? Try not to make up your mind before you have all the facts. Research should be used to realize the reality of the situation, not to prove yourself correct.
__ Is my decision based on the erroneous belief that I could’ve predicted a past event when I really couldn’t have? If you could have predicted it, why didn’t you? Everything seems obvious after the fact.
__ Is my distribution of investment dollars being subjected to mental accounting? Am I taking on more risk with this investment because I’ve mentally separated it from my other investments?
__ Am I giving equal importance to the possible gains and losses? It’s challenging, yet important, not to give more relevance to either the likely gains or the likely losses. Be detached and analytical. Consider all likely outcomes.
__ Am I free of the belief that past, unrelated events are influencing the success of my current investment? A flipped coin isn’t more likely to be heads just because the last several coin tosses resulted in tails.
__ Am I considering this investment just because it’s the popular investment at this time? Is there a sound alternative reason for considering this allocation of my investing dollars?
Investigate all of your investing decisions before you pull the trigger. You might find that you haven’t made the best possible decision, but are now able to correct it. Even the best investors monitor themselves and their decision-making skills.
Add this important checklist to your investing routine and enjoy more profits.
Disclaimer: None of the content in this newsletter is meant to be financial advice. Please do your own due diligence before taking any action related to content within this article.