Many years ago, I asked a friend why he bought the house he did.
“It’s the white picket fence,” he said. “I saw it and fell in love.”
Which is sweet, but, I thought at the time, also stupid. Fortunately for our friendship, I kept my big mouth shut.
However, the reality is — when you make an investment, your emotions need to be kept out of the equation.
In the case of a house — it’s more than an investment. After all, you live in that house. So atmosphere and esthetics are important.
That being said, if a white picket fence is critical to your joy as a home owner — you can always add one to the property.
Every time I’ve bought a house, I’ve focused on a few key factors.
- Is the house structurally stable? When asking this question, I ignore the cosmetic features of the house, which are easily modified.
- Instead, I examine the bone structure, which is not.
- Is the house in a good location? Real estate people often say that when it comes to buying a house, it’s “location, location, location.” If you want to make money on your investment — they’re right.
Is the house a good value relative to the other houses in the neighborhood? In general, I’ll pick a solid house at the lower end of the price spectrum for that particular neighborhood over the fancier offerings. In general, you will make a higher percentage and also be able to move the house more quickly if you need to sell.
Notice what is not factored into the equation above — my own personal preferences for things like paint colors or picket fences. These things do bring forth an emotional response, and that’s fine once you’ve bought the house and are deciding what you want to change.
But these emotions need to be ruthlessly pushed aside when it comes to determining whether the house is a good investment.
When it comes to more fluid investments, such as stocks, bonds and crypto currencies, then you’ve got to be even more dispassionate.
For example, right now Bitcoin has taken a beating.
After getting to a high recently, it’s dropped precipitously. Panicked investors who bought thinking they’d get rich overnight are dropping cryptos from their wallets like crazy. Hopefully they walk away only a little bit poorer.
This type of emotional reaction to the rise and fall of the markets is a poor way to manage your money.
Emotions are valuable and important in many aspects of life. You need to empathize with your partner, your children, your pets. It’s good to have sympathy for those who are suffering. Feeling joy when good things happen is wonderful. Feeling angry or sad can be valuable biofeedback mechanisms.
But none of these emotions are appropriate when it comes to dollars and cents.
When you invest, you need to educate yourself on the fundamentals.
Just as I took my time to try to understand a little bit about real estate before I bought a house, and to clarify what factors were important in order to make the most of my investment, so too you need to do this for yourself if you are planning to put your money into any investment vehicle.
If you’ve heard the hype about cryptocurrencies and decided to buy in because you didn’t want to be left behind as Bitcoin reached for the stratosphere — well, you invested based on emotion.
If, on the other hand, you did your research — then you’ll have a better handle on what, exactly, these ups and downs signify, if anything.
Smart investors may have added to their crypto wallets while the price plunged, knowing the fundamentals were still sound. Or they might have sold at the first sign of trouble, knowing that an unsustainable peak had been reached. But whatever decision they made — they did it based on an understanding of the investment.
If you can’t answer basic questions about blockchain technology and how Bitcoin differs from other uses of this distributed database, then maybe you should hold off investing in cryptocurrencies until you’ve done your homework. You might also want to ask what is fundamentally driving the move into Bitcoin, Ethereum, etc., and how these products are different.
Answering these types of questions will not only give you a firmer grasp on these investment vehicles, it will also give you a a better chance of keeping your emotions in check. The more knowledge you have, the more data driven your investment decisions.
When you invest based on knowledge and analysis vs. emotions, you are more likely to optimize your gains and less likely to loose your shirt.
The most critical investment decision? Know yourself.
Don’t deceive yourself into thinking you can do something if you can’t. Not everyone can disengage from their emotions. If you can’t, if you know that you’ll be a nervous wreck if your investments lose value — don’t go for the high risk investments. Sure, you may not get the gold ring. But you’ll also sleep better at night.
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This post was previously published on shefaliohara.medium.com.
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Photo credit: Mathieu Stern on Unsplash