People with financial knowledge and decision-making skills may make good financial decisions by applying problem-solving approaches, critical thinking, and a solid understanding of core financial facts and ideas. Investors with excellent financial knowledge and decision-making abilities can confidently analyze choices and make decisions for their financial situations, such as how and when to save and spend, evaluate prices before making a significant purchase, and prepare for retirement or other long-term investments. When making significant decisions, the optimal course of action can be chosen through a rigorous or rational decision-making process.
The following is a more straightforward procedure or approach to choosing a course of action through systematic decision-making:
Assessing the information at hand → Weighing the pros and cons of potential courses of action → Considering the effects of each → Taking a call.
Here are some pointers to help you make
1. Decide what needs to be decided.
To choose the best strategy, you must clearly understand the challenge. What is the decision to be made? Perhaps it is to pick an investment strategy or define your specific financial goals in real terms. Identifying and defining the precise challenge can be the first step to help lead you to set an achievable goal.
Take a simple task, like the desire to develop a lean body, as an example. You won’t succeed in your mission by simply deciding that you need to lose weight. You must incorporate the proper diet and exercise routines tailored to your body’s unique requirements. This moves you closer to your objective. What needs decision-making here is: Your precise definition of a lean body, in terms of weight, inches, etc., a timeline for when you want to achieve your goal, and an estimate of the amount of effort you can put in, given your current commitments. Even when making financial decisions, having specific objectives in place facilitates decision-making.
2. What are your alternatives?
To best accomplish a goal, consider and evaluate all potential solutions. Numerous financial instruments are available in the financial market to help you achieve your unique goals. Once your goals have been clearly defined, look into alternate paths (read: financial instruments). Consider your timeframe, level of risk tolerance, and long-term financial implications.
For example, take the most common goal of saving for your child’s future education. What are the possible investment avenues that can help you achieve this goal? If you have a well-defined objective of specific educational paths your child might undertake, like an engineering degree from a college in Georgia, USA, or a post-graduate degree from Canada, then it is far easier to pick an investment instrument. Here, you would ideally choose a dollar-denominated instrument to help you hedge against currency depreciation. Similarly, based on your timeframe and risk appetite, if the Indian financial markets show better-earning potential, you could choose to invest in the Indian markets for better ROI and shift to dollar-denominated investments as you near your goal.
While having various investment options may seem overwhelming, staying informed and updated about your options will help you make a clear distinction and decision.
3. Picking the best alternative.
Choose the option that best fits your requirements after weighing all the options. It need not be one option over the other. You could even choose a combination of the alternatives. Building a balanced investment portfolio requires a diversified set of investments. This helps you hedge against market downturns or cyclical shifts. While picking an investment for a specific goal, ensure you weigh it against the other investment instruments in your portfolio.
For instance, if you decide to invest in a specific Equity SIP for a 5-year goal, check if the underlying assets overlap with your existing set of equity holdings across instruments of direct equity, MFs, ETFs, etc. If it does, ensure your portfolio is adequately hedged with other alternative investment choices, such as debt instruments or fixed assets, to protect it from market volatility.
4. Act on the decision and follow up.
Merely picking an investment avenue and setting it aside till its due date is not an option. It is an effective strategy for certain fixed-income investments but unquestionably ineffective for equity-based asset classes. Once you’ve made an investment, be sure to check in on the performance of your assets on a periodic basis. Regular reviews are just as important as the investment itself. It should be an on-going process.
As you carry out your plan, assess how well you’re doing in achieving your intended goal. Does the strategy seem to work? How can you make it better? You can stay on course, stay informed and make wiser decisions in the future with the aid of a periodic performance review. This gives you the information you need to decide whether to rebalance, sell, or invest in areas with higher potential returns.
Making decisions can be the most difficult part of financial planning for some people, while it may be easy for others. Whether difficult a choice or not, every investor must ensure to follow a streamlined process to conclude on any investment avenue. When it comes to your personal finances, being methodical and process-oriented ensures that you reduce the possibility of personal biases, reflexive actions, and bad decisions.