Wednesday, October 29, 2008

Making Investment Decisions Together Helps Avoid Common Investment Mistakes

Two heads are better than one


Most common investment mistakes are deeply rooted in psychology. Many of these mistakes can be avoided by allowing another person to take part in the process and by giving this person’s opinions and believes an equal weight in decisions taken.

This person could be anyone from an investment broker, a financial planner or a trusted friend. However, who is more appropriate and worthy to take part in such sensitive and significant decisions than your life partner.

At first, some might flinch at the thought of an inexperienced or unprofessional person suddenly participating in a process that clearly requires a certain level of understanding and proficiency. Others might claim a spouse has a natural and given right to affect the financial decisions of the household.

I believe both arguments hold certain truths. However, I intend to show how allowing another to take part in the financial decision process, more specifically when it comes to investments, common mistakes can be significantly lowered or avoided at all.

Furthermore, a deeper and more intimate relationship has a better chance at avoiding these mistakes due to the mutual respect and understanding between the two partners. This mutual respect will assure both opinions are heard and a decision will be made together.

As I’ve already stated most common investment mistakes are deeply rooted in psychology. Some mistakes are a result of over-optimism and of success oriented planning. Others are a result of our innate inability to recognize our own mistakes (or success at times).

The following are three general common investment mistakes and how they can be significantly reduced or avoided by allowing your significant other in the decision process:


#1 Planning for the wrong investment term


Many investors get their investment terms wrong, planning for either shorter or longer periods of investment. Getting the investment term wrong usually ends in loss either as a result of not taking enough risk or taking too much risk accordingly.

Deciding on your investment term with your partner may produce surprising results. You thought you had at least 5 years before having your first child; I assure you your future wife has other plans. You may suddenly discover your husband isn’t as happy at work as you thought and he is contemplating a career change which will require higher levels of liquidity.

Communication is an essential part of living together and it is also, in turn, an essential part of your mutual financial planning.


#2 Acting on impulse


Be it investing on trends or on hot tips, selling too soon or too late or making all or nothing decisions every investor has been there and made his share of mistakes. I believe we all had wished someone could have whispered a word of warning in our ears or had calmed us down before we made those hasty and costly decisions.

Another person actively taking part in the decision process is another voice of reason. Simply taking the time to consult will often be enough to prevent yet another spontaneous and costly decision. On a more humoristic note image your wife after you’ve just told her about a great tip you got from a friend. One sour face and an “I don’t like him” just might have caused you to forget you’ve ever thought about buying that great bio-tech company you’ve just heard about.


#3 Lack of self discipline


It’s a known fact that two people have more discipline than just one. One individual constantly rationalizes reality to suit his wants and needs, convincing himself of certain scenarios and reasons and acting on them only to find reality backfiring on him.

Two people serve as anchors to one another. If you’ve ever trained with another person you must know how harder it is to quit or give up on yourself.

Your significant other can really help you stand fast against deviating from your goals and your earlier decisions. In investment this counts for a lot as constant switching is costly in commissions and lost returns.

Naturally, there are many particular investment mistakes which could be classified under these three groups or any other generic list of mistakes. The important message I’ve tried to relay is that your partner is invaluable in the decision process.

Another, less known fact is that women are better investors than men. If you need proof just think about your TV watching habits, constantly zapping between stations (stocks?) never really making the most of a single show.

Consulting with your partner has real added value, even if it’s psychological and not professional. Who knows? they might like it and make it into a profession or a serious hobby.

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Image by: fictionali

3 comments:

Aya @ Thrive said...

Making decisions with someone else could assure you that any mistakes aren't entirely your fault. If you made the decision with someone else, you might first blame it on the other person, but in the long run I think you would be able to talk it out and work it through better since you'll both know the whole story. If one person is dealing with it and he gets blamed for it, solely because the other person doesn't know much about it, it can make the situation even more frustrating that it already is.

Business Student Thoughts said...

I think you hit it right on the money that you need to have another person looking at your personal investment decisions with you, but I am wondering about your choice of who. You mentioned that psychology is the root of some problems with investment decisions. I agree. It is very problematic and dangerous to make investment decisions based on emotions. Do you think, however, that having a spouse being the primary adviser and/or joint decision maker might not be the best choice, at least as far as emotions go?

Dorian Wales said...

@ BST - good question. My post deals with the benefit of having someone restrain or reinforce you. Naturally, this is not enough nor should a spouse be the primary adviser, unless he or she are professionals. It is very important to go through a process before making decisions. A process in which a spouse has a very important role.