Your Best—and Worst—Financial Decisions May Have More in Common Than You Think
When you look back over your financial life, I'm sure there are decisions you're proud of and others you wish you could do over.
Maybe you purchased an investment that performed exceptionally well. Perhaps you sold something too early, missed an opportunity, or made a financial decision that didn't work out the way you expected.
It's natural to judge those decisions based on the results.
If we made money, we assume we made a good decision. If we lost money, we assume we made a bad one.
But after almost 40 years of working with families, I've learned that evaluating financial decisions isn't quite that simple.
Sometimes we make good decisions that lead to disappointing outcomes. And sometimes we make poor decisions that turn out surprisingly well.
Understanding that difference can make us better investors and help us approach our financial lives with greater perspective.
A Good Outcome Doesn't Always Mean It Was a Good Decision
Imagine someone investing a large portion of their savings in a single stock because a friend recommended it.
They don't spend much time researching the company or considering whether the investment fits their financial plan.
A year later, the stock doubles in value.
Was that a good financial decision?
The outcome was certainly favorable, but that doesn't necessarily mean the decision was wise. The investor may have taken far more risk than they understood and simply been fortunate.
Now consider someone who builds a diversified portfolio based on their financial goals, time horizon, and comfort with risk.
Shortly afterward, the market experiences a significant decline.
Was that a bad decision?
Not necessarily.
If the investment strategy was appropriate for their circumstances and designed to support their long-term goals, it may still have been a good decision, even though the short-term results were disappointing.
We should evaluate financial decisions based on the information available when we make them, not simply on what happens afterward.
We Often Confuse Luck With Skill
One of the challenges of investing is that markets don't always reward good decisions immediately.
Sometimes a risky investment performs exceptionally well. Other times, a carefully constructed portfolio experiences losses.
I've seen investors become overly confident after a successful investment, believing they've discovered a strategy that will consistently outperform the market.
That confidence can lead them to take even greater risks.
The opposite can also happen.
Someone makes a thoughtful investment decision, experiences a market decline, and begins questioning their entire strategy.
Both reactions can lead to decisions driven more by emotion than by sound financial planning.
This is why I believe humility and discipline are so important for investors.
We can't predict what the markets will do tomorrow, and we shouldn't expect every investment decision to work out exactly as planned.
The goal isn't to be right every time.
It's to develop a thoughtful process that gives us a reasonable opportunity to accomplish our financial goals over time.
What Did You Know When You Made the Decision?
When evaluating a past financial decision, I think it's helpful to ask yourself a few questions.
What information did I have at the time? Did I understand the risks? Was the decision consistent with my long-term goals?
And perhaps most importantly, would I make the same decision again knowing only what I knew then?
It's easy to look back at a market decline and wish we'd sold beforehand. It's just as easy to see an investment that performed exceptionally well and wish we'd purchased more.
But hindsight gives us information we didn't have when the decision was made.
We can't reasonably expect ourselves to have known the future.
Instead, we should focus on whether our decisions were thoughtful, informed, and appropriate for our circumstances.
That's a much more productive way to learn from our experiences.
Some of Our Most Important Decisions Have Nothing to Do With Investing
Throughout this series, we've discussed how financial planning involves much more than managing investments.
Some of the most meaningful decisions families make involve when to begin the next phase of life, how much to spend, how to help children and grandchildren, and how to care for loved ones.
These decisions also involve uncertainty.
Consider a family that decides to stop working earlier than originally planned.
They've carefully reviewed their finances, developed a spending plan, and considered the potential risks.
A few years later, unexpected expenses arise or financial markets perform poorly.
Does that mean their decision was wrong?
Not necessarily.
It may simply mean life unfolded differently than expected.
A thoughtful financial plan can't eliminate uncertainty, but it can help families prepare for different possibilities and make adjustments along the way.
That's one of the reasons I believe financial planning should be an ongoing process rather than something you do once and put on a shelf.
Don't Let One Experience Define Your Financial Future
Our past experiences can have a powerful influence on future financial decisions.
Someone who experienced a significant investment loss may become reluctant to invest again.
Another person who benefited from a successful investment may become comfortable taking risks that aren't appropriate for their circumstances.
Both reactions are understandable, but neither necessarily leads to better decisions.
Our experiences should help us learn, not cause us to abandon sound financial principles.
At Heritage Wealth Management, we believe investment decisions should begin with understanding what a family is trying to accomplish.
Money needed in the near future should generally be held in safer investments, while money intended for longer-term goals can remain invested for growth.
That approach doesn't eliminate risk, but it can help families stay committed to their plans through changing markets.
The goal isn't to avoid every mistake. It's to make thoughtful decisions and learn from the experiences that follow.
Three Questions Worth Asking Yourself
As you reflect on your financial decisions, consider these questions:
- Am I judging my past decisions by their outcomes or by the quality of the decisions themselves? A favorable result doesn't always mean a decision was wise, and an unfavorable result doesn't automatically mean it was wrong.
- What have my best and worst financial experiences taught me? Consider what you've learned about risk, discipline, patience, and your own behavior.
- Do I have a thoughtful process for making important financial decisions today? A financial plan can provide a framework for evaluating opportunities and challenges without relying on emotions or predictions.
These questions won't eliminate uncertainty, but they can help you approach future decisions with greater confidence.
The Most Important Question Is What Comes Next
As we conclude this 10-part series, I want to return to something I've believed throughout my career.
Financial planning isn't really about the money. It's about the people, relationships, experiences, and opportunities that money can help support.
Over the past several weeks, we've explored questions about what money means to you, what you're trying to accomplish, what concerns keep you awake at night, and how you respond to market declines.
We've discussed how financial decisions affect the people around you, why your plan should evolve as your life changes, and how understanding investment risk can help you make better decisions.
All of these questions share a common theme.
Good financial planning begins with understanding what's important to you.
Not what's important to your neighbor, your coworkers, or the people discussing investments on television.
What's important to you and your family.
I've had the privilege of working with families for almost 40 years, and one thing I've learned is that no two families are exactly alike.
Their goals are different. Their concerns are different. Their experiences have shaped the way they think about money.
That's why I believe the most valuable thing a financial advisor can do is listen, ask thoughtful questions, and help families make decisions that reflect their individual circumstances.
We won't always make perfect decisions. There will be investments that disappoint us, opportunities we wish we'd pursued, and circumstances we couldn't have anticipated.
But financial success shouldn't be measured by whether we made every decision correctly.
It should be measured by whether we're making thoughtful choices that move us closer to the lives we want to live.
You don't need to predict the future to make good financial decisions. You need to understand what matters most, develop a thoughtful plan, and remain committed to making decisions that support it.
Thank you for following along with The Questions Investors Should Be Asking Themselves.
I hope this series has encouraged you to think a little differently about your financial life and reminded you that some of your most meaningful financial decisions may still be ahead of you.
About This Series
This article concludes our 10-part series, The Questions Investors Should Be Asking Themselves, inspired in part by the perspectives of David Booth, founder of Dimensional Fund Advisors and author of Stay Calm.
At Heritage Wealth Management, we believe thoughtful questions are the foundation of good financial planning. Our goal with this series has been to encourage families to think beyond investment performance and consider how their financial decisions can support the lives they want to live.
Disclosure: This material is for informational purposes only and should not be considered investment, tax, or legal advice. Investment strategies involve risk, including possible loss of principal. The questions and concepts discussed in this article were inspired in part by the work and perspectives of David Booth, founder of Dimensional Fund Advisors and author of Stay Calm. Heritage Wealth Management is not affiliated with or endorsed by David Booth or Dimensional Fund Advisors.