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Three Questions before you Make a New Investment
One of the age-old pitfalls of investing is, of course, over-confidence. Financial planner Carl Richards puts it well in his book The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money. He suggests that overconfidence is not monopolised by Nobel Prize winners and Federal Reserve chairmen; but research shows that all of us are prone.
A team of researchers at the Goethe University in Frankfurt concurred in their report last year entitled Do Individual Investors Learn from their Mistakes? They discovered that although investors make wiser decisions with experience, provided they have learned from the previous mistakes they had previously made because of overconfidence.
Richards’ book is on the same lines, “We can recognize that we're not as smart as we think we are. In fact, the smartest investors are the ones who acknowledge that they aren't smart enough to forecast events or pick the best stock or avoid every scam.”
With this in mind, the author makes his clients ask themselves three questions before making a big investment decision:
If I make this change and I am right, what impact will it have on my life?
What impact will it have if I'm wrong?
Have I been wrong before?
If you ask yourself these questions – and answer them truthfully – it’s possible that you'll avoid the trap of overconfidence.
This approach ties in with MBMG’s philosophy, which is driven by the asymmetry of risk versus reward.
Please Note: While every effort has been made to ensure that the information contained herein is correct, views and opinions expressed herein may change with market conditions and should not be used in isolation.
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