Financial Questions to Avoid Before Investing
What is it that gets you excited about investing? Is it the opportunity to make a quick buck, the thought of taking advantage of compound interest in order to retire rich, or maybe the feeling of owning part of a great American company?
Unfortunately, often people get excited about investing their money by the dreaming big. They see companies like Hansen and Google that have created millionaires and their friends talk about amazing profits during cocktail parties. The next day the dreamer jumps in, only to find the party is over and the investment was a poor decision.
I know I’m guilty of getting excited about the potential of huge profits. It’s fun to stop and think, “what if . . .” But it is important to control that emotion and make sure you are not making money decisions based on hope. Investment decisions should be based on the likelihood of winning.
How do you avoid losing and chasing hope? Instead of asking yourself, “how much can I make off this investment?” take the time to consider how much is at stake. What is the potential that could actually be lost in the investment? What is the probability that the stock could go down, the real estate investment not sell or the company go bankrupt? These are the magic questions.
The key to investing is not how much you make, it’s how much you can minimize your loses. In a diversified portfolio you will have some big gainers, some that are slow and steady winners, and a few losers. In a diversified portfolio it is a given that your winners will perform better than your losers over time, so the focus should be on reducing your downside. By doing so, you will be making investment decisions with lots of upside potential, which will naturally accelerate your profits.
When you ask yourself “how much can I lose,” it forces you to really analyze what you are getting into. If you do your homework and answer correctly, you’ll find the opportunities with little downside risk and great profit potential.
Millionaire Money Habit: Don’t let hope cloud your investment decisions. Take the time to remove the emotion by asking what you could lose before diving into something that only makes you see the profit potential. -RT