Christmas trees can be dazzling with their lights, shiny ornaments, and tinsel. All of these things stimulate your senses. Enjoying these adornments on Christmas trees is satisfying, but shiny objects within the investment realm can create real problems. Beware.
If you think about investing through the lens of emotion, many inappropriate investments will find their way into your view. There are literally thousands of different investment products seeking your attention and more are being created every day.
Instead, if you think of investing based on your specific long-term goals, most of the shiny objects will fade from view. Your financial planning goals help tamp down the emotional attraction to the shiny objects that can easily pull you off track.
There are always multiple ways that you can invest to achieve your planning goals, but continually looking for the newest, shiniest, investment products may not be the best idea.
My wife and I recently flew into Sacramento on our way to Napa. We have driven to Napa from Sacramento before, but not often enough that we readily recall which route works best. The GPS provides 3 different routes, but recommends the one with the fewest miles. That route takes you through the mountains, which is much tougher driving than the slightly longer mileage route via the interstate. Sometimes, what appears to be the best route isn’t the best for you.
Your investing life is just like that. You can choose one route over another, but be aware that sometimes what’s presented as’ the best’ investment may not actually be ‘the best’ for you.
You don’t want to find yourself in the irrational circus chasing the current hottest performing shiniest object on the market.
Financial shiny objects distract you from what matters most in your life. What do you value? What are you trying to protect? Who do you love?
Your investment decisions should always seek to balance your short-term beliefs with your long-term needs. In other words, what you desire versus what you require.
Think about trying to “right size” your investment strategy instead of seeking to always “optimize” your choices.
Personal financial planning takes place at the intersection of money, history, and psychology. The money part is obvious. Financial market history stretching back almost a century provides a reasonable long-term perspective. However, psychology is where you actually make financial decisions. As one of my friends likes to say, “ the heart over the head.” Your emotions overrule your logic. That’s why shiny objects can be so dangerous.
Regardless of how much money you have, there generally isn’t enough money to do everything you want. You need to establish priorities. This means, choosing to do something, while simultaneously choosing not to do something else. Tradeoffs are the essence of personal economics. Shiny objects distract your field of vision away from the priorities and associated tradeoffs in your life.
Nobel laureate Daniel Kahneman says avoiding the negative is more important long-term than seeking the positive. There is wisdom in avoiding big mistakes.
Enjoy the shiny lights and objects this Christmas season. Just don’t let these interfere with your reasoned investment choices. Start there.
MERRY CHRISTMAS and HAPPY NEW YEAR!
Related: Most People Are Bad at Predicting the Future. Are You the Exception?