There are over 6,700 individual stocks to invest in, 7,691 Mutual funds, and 916 ETFs. Not to mention annuities and insurance products. This is a lot of investments to choose from.
In Bruce Springsteen’s “57 Channels and nothing on” he describes a world with all this STUFF, but is anything really there. Is anything really worth investing in?
Here is a three-step process for evaluating investments:
- Collect information
- Check your assumptions (Focus on facts – Not perception)
- Separate your interests from positions (Don’t fall in love with an investment idea)
COLLECT INFORMATION
I am a data junky. I track it, analyze it and use the data to make decisions. Collecting information for information’s sake is a time sink, but collecting information that will impact your decision or will drive future returns is beneficial.
I train a lot for Aquathlon. This is where you swim a mile and then run a five-kilometer race. To prepare, I track hours of sleep, “Did I wake in the middle of the night?”, “How long it took me to fall asleep?”, and “How I felt after I slept?” During training, recovery is even more important than the training, itself. So, I track all these information daily on a spreadsheet to monitor my recovery and tell myself if I should back off on my training.
CHECK YOUR ASSUMPTIONS
Leave your assumptions at the door. 10 years ago I was using AT&T. I had worked with AT&T for 18 years. I always thought they were a good company, whether I was traveling and needed phone card, or using them for my wireless network. They started double billing me and charging me extra. After several attempts to rectify the billing mistakes, I connected with a service rep. The rep was based in India. He was helpful, but his English was poor enough to infuriate me more than helping. As a result, I dropped my long-standing relationship with AT&T.
I started using them in 1986. I used them until 2004. Over 16 years I probably paid them over $100 a month. After the billing errors and the frustration of working with the service rep I dropped using AT&T completely. That was nearly 10 years ago. To this day I hesitate to invest in AT&T because of the awful service I experienced. They may be the greatest service agency now, but my emotion from that experience and my assumptions now about the company are tainting how I look at AT&T as an investment option.
SEPARATE YOUR INTERESTS
I believe investors should know why they are making an investment. If the investment change and your original belief change why you invest no longer apply, then sell your investment. Don’t let your emotion tie you to the investment and then sell them when it no longer applies.
There are thousands of investment options. Using prices to narrow down your investment choice will help you become more effective and be a better investor.
By James Cornehlsen, CFA
Keywords: Retirement, Mutual funds, ETFs