Monday, October 4, 2010

The Difficulty of Decision Making

Shirley Wang at The Wall Street Journal has an interesting article on a psychological issue - the difficult nature of decision making. A lot of the information in the article pertains to investing, as well. Generation Y may find that it's very difficult to make the tough decisions about financial issues because so much seems to be at stake. After all, if you plan incorrectly, have a mix of the wrong investments or the like, you risk financial ruin at a very young age. However, high stakes do not have to mean that decision making should be difficult.

Ultimately, almost everything in the world of individual investment can be whittled down into investment policy - the act of defining long-term financial goals and the means by which to achieve them. Every investor both young and old needs to have a sound investment policy. So, what does that policy consist of? As investors, we must first develop financial goals. For example, a goal may be that you would like to retire at age 55 with a nest egg of $2 million. Secondly, we should outline the appropriate ways to achieve those goals including the investments that we can use to help us get there. Lastly, we should determine the exact investments to put into our overall asset allocation and evaluate them accordingly.

This is a simplified way of creating a sound investment policy but you will find that if you work hard on it now, the amount of work required in the future on it will simply be a matter of tying up the loose odds and ends. Yes, it may be difficult to make decisions. With a rock-solid investment policy, it doesn't have to be.

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