About the author: This is a guest article written by Dorian Wales, a 30-year-old economist with an MBA in finance. Dorian writes frequently on his own blog, The Personal Financier.
Most common investment mistakes are deeply rooted in psychology. Many of these mistakes can be avoided by allowing another person to take part in the process and by giving this person’s opinions and believes an equal weight in decisions taken.
This person could be an investment broker, a financial planner or a trusted friend. However, who is more appropriate and worthy to take part in such sensitive and significant decisions than your life partner?
At first, some might flinch at the thought of an inexperienced or unprofessional person suddenly participating in a process that clearly requires a certain level of understanding and proficiency. Others might claim a spouse has a right to affect the financial decisions of the household.
I believe both arguments hold certain truths. However, I intend to show how allowing another to take part in the financial decision process, more specifically when it comes to investments, common mistakes can be significantly reduced or avoided at all.
Furthermore, a deeper and more intimate relationship has a better chance at avoiding these mistakes due to the mutual respect and understanding between the two partners. This mutual respect will ensure both opinions are heard and decisions will be made together.
As I’ve already stated most common investment mistakes are deeply rooted in psychology. Some mistakes are a result of over-optimism and success-oriented planning. Others are a result of our innate inability to recognize our own mistakes (or success at times).
The following are three general common investment mistakes and how they can be significantly reduced or avoided by allowing your significant other in the decision process:
1. Planning for the wrong investment time frame. Many investors don’t understand their true time horizon, when you plan to need and liquidate your funds, and plan for either shorter or longer periods of investment. Getting the investment time frame wrong usually ends in loss as a result of either not taking enough risk or taking too much risk accordingly.
Deciding on your investment time frame with your partner may produce surprising results. Perhaps you think you will wait five years before having your first child; it’s possible your future wife has other plans. You may suddenly discover your husband isn’t as happy at work as you thought, and he is contemplating a career change requiring higher levels of liquidity.
Communication is an essential part of living together and it is also, therefore, an essential part of your mutual financial planning.
2. Acting on impulse. Whether investing based on trends or on hot tips, selling at the wrong time, or making all-or-nothing decisions, every investor has been there. Every investor makes his share of mistakes. I believe we all had wished someone could have whispered a word of warning in our ears or had calmed us down before we made those hasty and costly decisions.
Another person actively taking part in the decision process acts as a voice of reason. Simply taking the time to consult will often be enough to prevent yet another spontaneous and costly decision.
On a more humorous note, imagine your wife after you’ve just told her about a great stock tip you got from a friend. One sour face and an “I don’t like him” just might cause you to forget you had ever thought about buying shares in that great bio-tech company you heard about.
3. Lack of self discipline. Two people have more discipline than just one. One individual constantly rationalizes reality to suit his wants and needs, convincing himself of certain scenarios and reasons and acting on them only to find reality backfiring on him.
Two people ground and anchor each other. If you’ve ever trained with another person you must know how harder it is to quit or give up on yourself.
Your significant other can help you stand fast against deviating from your goals and prior decisions. This is important when making investing decisions because constant buying or selling is costly in commissions and lost returns.
Naturally, there are many particular investment mistakes which could be classified under these three groups or any other generic list of mistakes. The important message I’ve tried to relay is that your partner is invaluable in the decision-making process.
A less known fact is that women are better investors than men. If you need proof just think about your TV watching habits, constantly zapping between stations (stocks?) never really making the most of a single show.
Consulting with your partner adds value, even if it’s a psychological message rather than professional advice. Who knows? They might like it and turn advisory skills into a profession or a serious hobby.
If you enjoyed this article, please visit The Personal Financier for more thoughts about investing wisely and economic trends from Dorian’s point of view. We would appreciate your comments and reactions, so if you would like to contribute to the discussion, add your comment below.
Updated September 27, 2011 and originally published May 30, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.