Habits Checklist (click to expand)

Invest a weekend to discover your personal economic values (PEV). Print your PEV statement and keep it where it will remind you of your underlying values at the most critical moments. Every year or two, take an afternoon or a weekend to review the eight steps in Chapter 4. Then, align your decisions with these objectives so that the cumulative effects of your choices lead you to your goals rather than making a series of event-driven transactions that may lead you astray. This process will also result in fewer decisions overall because each of your decisions will direct you to your goals. You’ll also limit the negative effects of bias on your outcomes when you center your decisions on your PEVs.

Use an IPS as an uncomplicated financial business plan. Provide a copy to any professionals helping you reach your financial goals. Reread your IPS prior to your periodic investment review or whenever you make important investment decisions. Reviewing this document brings your constraints, objectives, and other essential guidelines top of mind when formulating decisions. This tool is also an excellent way to communicate with professionals, aligning their advice with your goals, and for holding them accountable.

Consider suppressing your monthly investment statements and stop watching investment news broadcasts so keenly. Instead, schedule an annual review of your assets to confirm transaction accuracy, adherence to your strategy, and track your goals and returns. If you are your investment manager, schedule your reviews in advance at a frequency that makes sense rather than attending to your decisions during dramatic or stressful financial events when emotion and bias are influential.

If your investment strategy isn’t performing up to your expectations, consider investing in the broad market using low-cost exchange traded funds (ETFs) instead. You’ll eliminate your risk of underperformance and have the added benefit of reducing stress.

Knowing about bias is not enough to keep you from its influence.

Avoid the displeasure of feeling responsible for the outcomes from random events. Instead, focus on your long-term goals and disregard market gyrations. You’ll be tempted to believe you see patterns in unexpected price changes. Market events are largely unpredictable, and hindsight bias leaves powerful feelings of regret. If you could have made a different choice with the information you had, you would have.

The proportional money effect influences you to focus on small values when transactions are small and disregard these values as the transaction size increases, yet large transactions offer the best opportunity to keep more of your money.

Calculate the percentage – rather than a dollar amount – that your investments grow each year compared to a relevant benchmark. Adjust your returns to account for your contributions, withdrawals, and fees. Relative returns help limit the psychological impact that anchoring and high water marks have over the satisfaction you feel about your investments. Also, a comparison to the broad investment market will demonstrate when your strategy is successful or whether you are one of the 50% of investors who can improve your performance by investing in a passive broad-market strategy instead.

Keep them where you can easily review them. Rereading past thoughtful decisions can limit the emotional influence of hindsight bias. The process of writing things down also promotes a higher accountability in your process and more thorough due diligence. Moreover, it’s easier to detect when your initial investment criteria have changed when you can refer to your initial decision criteria, often informing when to exit a strategy or encouraging you to stick to your convictions.

For example, you may decide not to invest more than 25% of your assets in companies that don’t pay dividends. Or, you may prefer to avoid businesses in a particular industry or sector. You may decide not to speculate, hold volatile stocks below a minimum market capitalization (size). You may also wish to avoid certain investment schemes or well-meaning nonprofessional advice. Whatever your constraints are, record them in your IPS.

Whenever you make a financial decision, compile a list of reasons why you shouldn’t make that choice. You will better calibrate your outlook by building a strong counterargument rooted in rigorous skepticism. You may be inclined to feel that it’s a waste of time because your natural tendency is to seek supporting information, not generate counter arguments. This bias will motivate you to cut corners and can just as easily throw you under the bus.

Commit to increasing the amount you save annually or whenever your income rises. Similarly, increase your mortgage or loan payment by any amount each year. Each additional payment you make is directly applied to reducing the amount you owe. Automate these increases whenever possible.

The sooner you start any savings plan, the sooner your money begins the doubling process, and the less capital you’ll need to invest overall. Time is literally money. One way is to immediately participate in a company-sponsored investment plan when its available, even if you’re unsure about your options. It is more critical to begin the program than to select the ideal investment. Another is to start a small contribution to your savings, even if you don’t know your plan yet.

Only buy or hold securities that meet your criteria for investment. If an investment no longer meets your objectives, is no longer suitable, or when it meets your reasons to exit, sell it. Other than for calculating taxes, the price you paid for an investment is irrelevant. The adage to buy low and sell high is an oversimplification of the math behind making a profit, not advice.

Also, selling investments that rise for the sole purpose to capture a capital gain, or holding onto stocks that drop hoping they’ll regain former a price, are not investment strategies. They are examples of bias at work.

Offer the highest reasonable price that will entice a buyer to accept or counter your offer. As a buyer, anchor the seller to the lowest reasonable price to induce the seller to respond. The following counteroffer will provide information about their willingness to amend their price. With that information, offer your best and last price, and always be willing to walk away from the transaction if the price is not fair.

Patience pays off when the likelihood to receive full value is reasonable. It just feels more comfortable to create certainty. Figuring out the price of early settlement can be an effective way to evaluate what you’re giving up to satisfy your fears.

Preestablished decisions reduce bias and emotion in your choices. Reducing the number of choices you face limits the effects of bias and the stress of decision-making.

For example, by establishing electronic contributions, your fear of volatility won’t interrupt your well-devised savings plan. You can also schedule time to review your investments and financial affairs on a specific date. Program fixed expenses, various payments and other asset transfers with your bank. Automate periodic rebalancing of your investments so that your assets are brought back into line as market prices shift. When complete automation is not possible, schedule a reminder, and for each task, include all instructions, guidelines, processes, contacts, and other helpful information to reduce impediments to completing the job.

The early investors make the biggest returns and those late to participate, have poorer returns and higher risk. Consensus hurts performance because when others are investing, the best returns are already taken. Despite the increase in confidence when following the crowd, doing so can increase your risk unnecessarily.

Set aside funds for your fixed expenses and long-term goals in a separate account. Apply both regular income as well as windfalls to your fixed costs, long-term objectives, and non-tax-deductible debt. Similarly, apportion some of your regular income to personal enjoyment.

Have them provide insights into their strategy to manage your assets, their decision-making processes to limit bias, and the method to evaluate your results.