Financial Decision Making

I find it fascinating how much the media and general trends affect our decision making processes. I often see this clearly exemplified on the ASX (Australian Stock Exchange) where retail investors often follow the trends, and one media article can cause a huge swing in buying and selling behaviours.

I understand that when it concerns their hard earned cash people get scared. They may be wanting to follow the crowd if they're feeling nervous about loosing money, or worrying that they might be missing out on a huge opportunity if they don't act quickly. The funny thing is that sometimes these trends are purely based on speculation and rumours, and could potentially be fake news spread around so someone could make a profit.

We saw this with the Telstra (ASX: TLS) share price recently. Although there were in this case some cold hard facts regarding a dividend reduction and lower than expected annual report profits, everyone suddenly went scrambling to get Telstra shares off of there hands as quickly as possible. This resulted in a very noticeable drop in share price, which in turn prompted others to sell, often at a loss.

While this was happening plenty of online sites were spreading speculation that the share would never be the same again, which further added to the growing alarm towards the future for Telstra shareholders. I don't know what will happen with Telstra, but I do know the good financial decision making is now more important than ever.

It's important when making any financial decisions that you fully understand the implications of what you're doing, and are comfortable with the risks involved. Don't just sign a contract because your friend recommended the product without doing your own research first. Similarly if you're putting money into an investment, make sure you understand who is holding your money, and whether they are regulated or not.

Here are some important points to consider when making a financial decision:

  • What are the risks, and do they outweigh the potential rewards?
  • What a the management and performance fees (if any)?
  • Is the company regulated by APRA or ASIC?
  • Where are the funds held, and what security do you have over them?
  • How and when can you get your money back?
  • What will be the tax implications of any gains made?
  • Does it sound to good to be true?

All the best,