Just why do you make the decisions that you do? You may think it has to do with facts and figures, but your behaviors and how you respond to risk and reward determine a lot of your actions. This is part three of that discussion.
When it comes to your financial decisions, you may think it’s simple. Or maybe you think it is impossibly hard. Either way, have you stopped to think about what guides those decisions? When you invest, you are often led to do so by behaviors.
This is part three in our series as we discuss the “Laws of Investing” by Morgan Housel. (Check out part one and two to get the full rundown!) By applying these concepts to our finances, it makes it a bit easier to understand why things happen the way they do.
For instance, having a diversified portfolio will set you up for a variety of events happening. Because the reality is, you will have a hard time guessing everything correctly.
But then how do you know if something is off or needs correcting with your portfolio? Think about your car — when you go out and turn the key and it doesn’t start, you know something is wrong. So how do you determine if your portfolio is broken? Is it after one day, one year, five years?
You may be tempted to look to the data and analytics when making a decision, but the behavior is just as important (if not more) to understand. That’s why advisors will not only present you with the numbers but try to coach behavior so you that can think before you leap in the financial world. Ask yourself, what is causing you to make a certain decision?
By talking through the behaviors and tendencies regarding what goes into the decision making process, we hope to give you a deeper awareness and more clarity on your next financial decision.
Listen to the full episode or click on the timestamps below to hear more about a particular law of investing.
[2:48] – Law #9: Big results are driven by tail events.
[6:09] – Law #13: Diagnosis errors create a tendency toward action.
[9:24] – It won’t help you to have more action and changing things around.
[10:27] – Law #15: Behavior is over analytics, because one can’t be taught and the other can.
[13:20] – Data is influential but the chemicals in our brain make the ultimate decision.
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