In 2006 The Harvard Business Review put out a management article entitled, "The Hidden Traps in Decision Making." The article discusses the way our own brains can sabotage the choices we make.
When we have investment decisions that backfire on us or ones that go horribly bad, we are extremely quick to point the finger at everyone but ourselves. Falling into the trap on a regular basis can cause you to make the same bad financial decisions repeatedly with your investments.
Today we are served up media at a frenzied pace. Between television, social media and various new outlets, including podcasting, we are consuming information often much more quickly than our brains can process the information. The important question you should be asking yourself is whether you have a systematic process on how you make decisions when you invest your money and when you plan to exit the positions you hold today.
Here are a couple of scenarios on some hidden traps you may have experienced in the past when it comes to your investments.
It's happened to the best of us, no matter what our education. You are at a dinner party or having a conversation in the kitchen at work when you hear someone say, "I just made 100 percent profit buying ABC stock, and this thing is just taking off." Irrespective of our intellectual quotient, when we hear of opportunities to make money quickly, it always peaks our interest. After you hear this tip from a person whom you trust and like, you already become biased that this is, of course, a very good idea.
What happens in the ensuing number of days is that you begin to look for evidence that this hot stock is a good idea for your portfolio. When you do your Google search, you inherently look for the article that makes you believe this will be the next big stock. For example, if you chart the stock on Google Finance, you might see a link on the right-hand side that says, "Why ABC stock will be the next Amazon."
After you convince yourself that this is a good idea, without having anyone else debate the merits about it not being good, you then go ahead and make a trade in your account and buy this hot stock.
We don't realize the power of our own motives, and we aren't honest with ourselves about our motives. Nobody likes to admit losing money, which is why your friends will always tell you they broke even when they come back from Vegas. (Hint: The words "break even" are code for "lost money.")
When it comes to stocks, people can remember how in love they were with Nokia, Motorola and BlackBerry, all which have already seen their better years.
Whether it's Apple or some other market titan, do you even know what your exit plan will be to get rid of a stock, or are you holding on to it because everyone says you should? Seek the advice of other experienced outlets or advisors so you aren't so biased that you blind yourself from a losing situation or aren't smart enough to walk away from the table with some profit in your pocket when you win.
When we make substandard investment decisions that impact our financial situation negatively, we need to begin to question our own decision-making process for making investment choices.
Should you continue to do this on your own? Should you continue to use your current advisor? Should you do more research before you make an investment?
Maybe the reason that some of your investments didn't turn out the way you wanted them to in the end was because you simply didn't have a good solid decision-making process and were affected by traps you weren't even aware of when you made them. With the markets at all-time highs, ask yourself if you have a defined process going forward on how you enter and exit the market.
A savvy investor must evaluate each investment option on its own merits. It's key to make sure you are comfortable with the concepts of the investment and be confident the allocation is appropriate for your financial plan.
— By Ted Jenkin, co-CEO and founder of oXYGen Financial