Choosing Investments That Reflect Your Goals, Not Somebody Else's

Communicate your goals clearly, and stay focused on a simple game plan

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Blindly following investment advice is a recipe for financial mediocrity.

Read to the end of this article to learn:

• Why it matters that your investments be matched with your goals.

• Common and one uncommon method to determine the right amount of investment risk to take

• How people can be easily influenced by the offer of a new investment product—and why changing course on your investment plan can tank your portfolio.

The Impact of Behavioral Risks

Here’s a mistake a lot of investors make:

Trying to make “the most money possible” with their investments.

That is not a real plan.

A more rational investment plan is “taking the least amount of risk required to meet my goals.”

The more ambitious your goals, the more aggressive your investments are likely to be, but there’s no reason to jeopardize a plan by taking on more risk than what is required—or that you can handle.

Once you create a portfolio that maximizes your odds of achieving your goals, the most important thing you can do is also the hardest:

Do nothing.

Every time you tinker with your portfolio, you create ‘behavioral risk’—the risk that you make the wrong decision that costs you money.

Let’s say you started out with a boring but effective portfolio of a mix of stocks and bonds.

This portfolio was designed to help you hit your retirement savings goals—but a few years into the plan, you get bored and sell that boring portfolio and invest in some hot new investment that a financial advisor, financial salesperson, or even worse, an investment blogger talked you into.

(For a clearer idea of what boring but effective investing looks like, read this.)

Investing in the Stock Market Explained in 5 Words

In the beginning, everything is going great, and your portfolio is going to the moon.

But, then, things take a nosedive.

Since you invested in something that’s too risky for you to handle and you never fully understood, you begin making more changes to your portfolio:

• Panic selling

• Market Timing

• Changing to the ‘next’ hot new investment

Rinse and repeat until you’ve permanently scrambled your retirement nest egg.

Your brain wants to sabotage your boring but proven investment plan

This tendency is not just anecdotal; research supports it.

A 2004 research paper titled Promotion and Prevention across Mental Accounts: When Financial Products Dictate Consumers’ Investment Goals explored how being offered different investment products influenced people’s investment decisions.

Last week, when writing about how to choose a career you will be satisfied, I introduced the two forms of self-regulation:

1. Promotion

2. Prevention

Self-regulation in finance refers to how we control our impulses and emotions when making investment decisions. It's about balancing the desire for potential gains (promotion focus) with the need to avoid risk (prevention focus).

The researchers found that a person’s financial goals can actually be changed simply by being offered a particular type of investment.

Let’s say you were invested in a 60/40 portfolio of stocks/bonds.

Then, you are pitched an investment in an ETF specializing in AI companies (or whatever investment is trending at the moment)—touting these as the next industry to dominate the market.

The simple act of being offered the opportunity to invest in this investment that promises high-upside taps into our ‘promotional’ self-regulation and primes us to be more receptive to investing aggressively.

Maybe you don’t invest in the AI ETF, but it gets you thinking you need more growth in your portfolio—and you start to tinker. You increase the allocation to stocks even though that is more risk than you need to achieve your original goal.

These findings challenge the traditional view of how investment decisions are made, which assumes that investors have fixed goals that guide their investment choices.

This research implies that the presentation and nature of financial products can influence and even alter an investor's objectives, leading to decisions that may differ from their initial goals.

Put simply:

The right sales pitch can lead people to throw out their current investment plan.

Final thought

Being aware of your natural inclination towards promotion or prevention can help you recognize when you're making decisions based on emotion rather than strategy. This awareness is key to maintaining a disciplined approach to investing.

In the long run, the boring, diversified investor who is able to avoid the temptation to tinker with their portfolio will almost always outperform the person who is constantly chasing the hot new investing trend.

Once you’ve done the work of creating a portfolio that gives you the best odds of achieving your goals, do yourself a favor and unplug from conversations about hot investment trends, market predictions, and whatever “game-changing” technology is supposedly about to disrupt the market.

Becoming a successful investor is not that complicated. If you can avoid making silly mistakes, you’re already ahead of most people.

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.