Investing success: Try this formula

Zoomer | January 1st, 2006

When it comes to making financial decisions, people are often intimidated by the apparent complexity of the issues they face. But it doesn’t have to be that complicated. Here’s an approach that may make the process somewhat easier.

There are four keys to success in investing and personal money management. I call it the AAAA formula. Use it on a consistent basis and you’ll never go far wrong. These are the components:

  •  Anticipation:

    • Too many people base their decisions on what has gone before, not on what is likely to come. I’ve labelled this Rear-View Mirror Investing in my books. While history can be a great teacher over the long haul, it is a poor predictor of short-term developments.

    In fact, the odds are that what happens over the next 12 months will be very different from the events of the year just passed.

    The smart investor therefore always looks ahead and makes moves accordingly.

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  •  Assessment:

    • Of course, forecasting the future is never easy – just ask any economist. We may be pretty confident that we know what’s coming down the road and then be sideswiped by unexpected developments.

    Think back to last summer for a recent example. It was the general consensus that the recession was winding down and that recovery was on the way. Interest rates had reached their low for the cycle, it was believed, and would probably start moving back up in the fall. The worst was behind us.

    Then came the events of September 11th and everything was turned upside down. We are only now getting back to the mind-set that prevailed six months ago.

    The point is, as we look ahead, we need to make reasonable assessments about the likelihood of certain things occurring. You can do this by using a scale of probability approach. Nothing is 100 per cent sure, so we work down from there.

    Personally, my top probability rating is 80 per cent; my lowest is 10 per cent. By assigning a probability rating to each potential major development, you can better assess how to commit your financial resources going forward.

    Next page: Advice, Action

  • Advice:
    No one knows it all. We all need input from other sources in order to make informed decisions. That input can range from a close reading of the business and economic news to using a professional financial advisor who understands your personal needs and in whom you have confidence. The financial world has become extremely complex. Decide on which sources of information you trust and make maximum use of them.

  • Action:
    Nothing is ever achieved by sitting on your hands. How often have you said to yourself: “If only I had bought that stock when I intended to”. Or: “Why didn’t I sell?” Or: “I should have locked in that mortgage rate.” You won’t always make the right decision and sometimes you may wish you had done nothing. But if you use the first three As of the formula properly, you will greatly improve your chances of success when the Action phase comes.

    From an article that originally appeared in the Internet Wealth Builder.