Two Steps for Making Investment Decisions
In my experience there are basically just two steps that should guide and define all your investment and trade decisions. I have talked about it before and thought to revisit it as a reminder to keep things simple is always good.
1.) Know your Goal
Why would you ever invest in anything if you do not know exactly what you are looking to get out of it and how you will exit it when that goal is reached?
You see this more in active trading as people just jump in and out of stuff aimlessly with no clear target in mind. However, you see it happen in my illiquid investments like real estate too.
You have to know what the end goal is before you enter an investment otherwise I promise you that you'll be changing it on the fly and making emotional decisions on the fly.
It is not rocket since. Say for instance you are entering into a trade on bitcoin - is it a swing trade, a day trade? What is your upside and downside targets? Are you going to hold for one of those or look to book profits on daytrade?
It seems so trivial these questions, but they are actually very much a key to success.
2.) Define and Accept Risk
If you do not define what the risk is on an investment then a couple things happen. First, you leave yourself open to unknown exposure and then will have to make emotional decisions on the fly. Second, you cannot accept the risk because you don't know what the heck it is!
Accepting the risk on a trade or any investment is paramount before entering it. If you do not truly accept the risk then you will not have the fortitude to stick with the plan and get to your goal.
I know this from my own experience and from years of watching others do it. Truly accepting the risk on an investment liberates you to make logical decisions based on information.
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