By Bob Brooks
February 17, 2015
There is a psychology that lies underneath investing. In fact, psychology influences everything when it comes to money and investing. Why do we make the decisions that we make? Why do we react either with fear or greed? Why do we hang onto investment losers? Everyone has an investment DNA. At the heart of that DNA is our ability to interpret risk.
In step 2 of my 5 step approach, I talk about evaluating your strengths and weaknesses and discovering your Prudent Money DNA. A lot of that has to do with how we interpret risk. This ability can either be a strength or a weakness.
Some of the key questions:
How do you react to losses and gains?
Most people don’t know that there is such a thing as acceptable losses. Further you might have a few investments that are losing money in your portfolio and it makes no sense to sell them while there are extremely profitable ones in your portfolio that should be sold. Do you ever see a gain and experience disappointment?
Do you look at results with your investments in terms of percentages or dollars?
This is a key question. You can only effectively evaluate your progress with investments by looking at your investments in terms of percentages. Dollar gains and losses are only key one time of year. Percentages are important every day. By strictly looking at results in terms of dollars, you could be coming away with the wrong interpretation.
How do you know if the risk you are taking is ultimately effective?
You might be making money hand over fist and at the same time taking the wrong kind of risk.
How often do you evaluate your investments?
If you say daily, you need a very high tolerance for risk. Without the right Prudent Money DNA, daily checking of your investments will create emotional investors. Evaluation of investments should only occur 4 times a year.
Do you ignore your investments?
The most conservative investment in the world could turn into an aggressive investment simply because you are ignoring it.
These questions are just a sampling of the information you need to know about yourself to determine your Prudent Money DNA. Your ability to understand your Prudent Money DNA is either going to help you or hurt you. Beyond starting this series to help you, I am also going to roll out a Prudent Money DNA Survey.
This will be a free resource where you can answer these questions and a written analysis will be sent out to you. This analysis will outline potential weaknesses, help you be aware of them, and resources to strengthen your understanding.
A dramatic shift could be ahead in the investment world. Those who understand their Prudent Money DNA will whether that storm much better than those who do not.