Nearly everything you do on a regular basis is accomplished by following a process. You follow a certain sequence of steps to accomplish your objectives, like when you bake a cake or get ready to go to work in the morning.
Your level of success in any activity is largely dependent on the quality of your process and your ability to follow it accurately. Likewise, smart investment decisions require a solid decision-making process.
Try this sequence of steps before making your next investment decision:
1. Figure out if it's the best use of your money.
Paying off a credit card with a 22% interest rate is likely to result in a better return than any other financial investment.
In most cases, investing is a smart move, but not always.
2. Consider whether the investment is congruent with your investing timeline.
All investment goals should have a timeline. Does this potential investment match the deadline of your investment goal?
It doesn't make a lot of sense to invest in ultra-conservative short-term investments to achieve a goal that's 20 years into the future.
3. Evaluate the level of risk.
Is the risk level appropriate for your timeline and your comfort level?
4. Ensure you understand the investment.
Some investments are extremely challenging for even financial professionals to fully grasp. Avoid being lured into investments that are beyond your current level of expertise.
Albert Einstein once said that you may not truly understand something if you can't explain it to your grandmother. Could you explain your investment to your grandmother and make her understand?
It's not easy to be successful with something you don't understand. Seek advice from a financial expert and then try explaining your investment to someone with less financial sophistication than yourself to show you fully understand it.
Do you know everything you need to know? Some investors have a habit of knowing 90% of what they need to know and then decide that's 'good enough' because things get too tedious.
5. Ask yourself why you're enamored with this investment.
Warren Buffet once implied that if people were limited to ten investments, they would make their choices more carefully and end up extremely wealthy. Would you make this particular investment if you were limited to only ten?
Are your investment choices based on valid reasons?
Did your research verify your decision?
Would you feel confident recommending this investment to a friend or family member?
Are you guilty of any behavioral finance biases?
6. Assess what level of monitoring the investment will require.
Some investments require little monitoring. However, many require constant attention.
Are you prepared to do the necessary work and do you know how?
Create a schedule for follow-up that's appropriate for your investment.
7. Know when to get out of the investment.
Every investor is well served by knowing when and how to get out of an investment. Know your exit strategy and the signs that it's time to get out of an investment.
What signs will you look for as a signal that it's time to sell?
Is your investment sensitive to interest rates?
Will a change in technology render your company's primary product or service obsolete?
Many people view investments like lottery tickets and they spend more time investigating a vacation spot than they do researching where their money is going.
Give your investments and your future the respect they deserve. Try this process before making your next investment decision. Using a good decision-making process will always give you better results.