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News/Investment Wisdom: 6 Pillars of Strategic Decision-Making

Investment Wisdom: 6 Pillars of Strategic Decision-Making

COIN360

Jan 29 2024

5 months ago3 minutes read

6 Principles to Base Your Investment Decisions On

Warren Buffett once said that if he made a video about the early morning habits of a billionaire, everyone would tune in and listen. However, once he starts speaking about the investing itself, people start tuning out.

People, naively, want others to tell them where to put their money but they lack the discipline to actually develop habits to lead to reliable decision-making.  

In other words, we’re not telling you how to invest. Whoever makes this suggestion or pretends to be able to give definitive answers is definitely lying. Instead, we’ll help you understand the principles that are leading you down the path of data-based decision-making. 

With that in mind, here are six solid principles that you should base your investment decisions on. 

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What happens if it fails?

In an ideal world (the one where you were omniscient), you would just be able to instantly tell which asset (be it a stock or a coin) is the most profitable. Then, you would put all your money toward it. The problem is that you never know which of these assets will go up, let alone by how much.

This is why it’s so important to diversify.

A good portfolio works in your favor, no matter the outcome. What do we mean by that? First of all, a successful trader sets things up so that they can stay in the green with as little as 25% of successful trades.

The majority of your funds should be in the safest venue possible. We’re talking about stocks of the largest companies in the world. Can these companies fail? Yes, but if they do, the whole economy is collapsing.

You also want some funds in low-correlation assets (like precious metals).

Lastly, you want a part of the funds to be dedicated to risky trades. This is where you maximize the potential gain. Speaking of which.

What is the potential gain?

When it comes to assessing the best crypto to invest in, the majority of people refer to the risk-to-reward ratio.

What do we mean by that?

Well, if someone told you that you have a 10% chance to win $10 by investing $1,000, you probably wouldn’t believe that this is such a great deal. However, if someone told you that you have a 10% chance to win $1,000 by investing just $10, suddenly, the equation seems a lot more in your favor.

Sure, when it comes to investing and the economy, the equation is not as simple, but that’s really the essence of it.

 

  • What are the odds of success?

 

  • How good does it get if you make it?

 

  • How bad is it if you fail?

Finding the answers to these questions is pretty difficult but necessary for anyone who wants to know what they’re doing.

You see, you’re not gambling - you’re investing. This means that you need to understand the odds and preferred outcome and have a contingency plan.

Where is my information coming from?

Information doesn’t have to be verified to be published. Still, if it’s coming from a reliable source, your chances of it being legitimate are substantially higher. This is why you need to figure out where you’re getting all your information from.

Sure, some info is objective. We’re talking about value heat maps, charts, and graphs. These are just there to show you any asset's current and historical value. At the same time, if you see a projection, its validity depends on the skill, experience, process, and accuracy of the person/algorithm handling it.

There’s one thing that’s far more important than what you’ve read - where you read it from.

While diversifying your portfolio is incredibly important, it’s usually a good idea to find your “main” asset and spend as much time as you can learning as much as you can about it. Not just that, join a community, follow a blog and a newsletter, and more. It’s in your own best interest to stay as informed as you can be.

Is there an investment strategy I can use?

Making your decisions systematic instead of relying on impulse decisions and gut feeling is what this is all about. When it comes to strategies, you don’t have to develop anything new. There are so many well-established strategies for you to consider.

  • Dollar-cost averaging: This is a strategy that revolves around the amount of money you’re willing to invest, regardless of the cost of the actual asset.

 

  • Value investing: Here, you assess the asset with strong fundamentals. Based on that, you expect the value to grow in the future.

 

  • Dividend investing: In this scenario, you’re mostly focused on creating a passive income.

These strategies are not just there to help you stay on course but also to facilitate your learning process. Learning is a lot easier when there’s a clearly paved path down the middle. 

How does this fit my investment goals and objectives?

There’s a difference between a tactic and a strategy. A strategy is anything that brings you one step closer to your end goal, while a tactic is something that creates a temporary gain. 

 

The first thing you need to do is set a specific life-relevant object. 

 

  • You want to have the X amount of money in your account. 

 

  • You want to buy your own home.

 

  • You need X amount for your retirement.

Make sure that you pick something that’s relevant to you personally.

The next thing you need to do is quantify your financial goals. Each of these goals needs to have a specific number next to it. You also want to make it time-sensitive. This X goal needs to be achieved in Y time. Given enough time, every investment could grow into its original goal, but some deals are objectively not that great. After all, everyone would agree that earning $10 in a year is a really nonsensical deal.

Can I immobilize my funds for that long

When you make an investment, you’re turning your liquid assets (cash) into, more or less, frozen assets. In order to use a lot of these assets, you would probably have to sell them first, which is a bit of a problem.

Sure, a lot of vendors accept cryptocurrencies, but even then, this won’t be the case with all the vendors and scenarios but, generally speaking, picking assets that are more liquid is a good idea.

This is also one of the main reasons why people pick day trading over position investing. When you freeze your assets in a long-term investment, when the opportunity arises (and FOMO hits), you won’t be able to use them the way you want to. 

Don’t get us wrong, neither is good or bad. You just need to understand what freezing your assets means and all that it entails before you agree to it.

With the help of the right principles, you’ll have the investor mindset in no time

There’s nothing wrong with being wrong, as long as your decision-making and thought process are solid. If this is the case, you just had bad luck, and you’ll get it next time. However, if the entire process is wrong, even success will be only temporary. This is why you need to address this problem at its root, and by following these six principles, you’ll already be on the path to solving this issue. 

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