Pennsylvania Investment Observer

Decision Making 101

by Daniel J. Nestlerode

Buying investments is like no other decision making process in life. No where do we avoid admitting mistakes, change decision making criteria or become more unconscious about our results except when it comes to our investment portfolios. To see if you should finish this article ask yourself one question right now. What is the annual rate of return on your portfolio year to date 2004? If you know the answer, you can skip the rest of this article and go directly to the funnies. If you don't know the answer, then read on. Not knowing the answer, or how to get it quickly, means that you are either have a blind spot in your portfolio management or you're unconscious about your numbers or both. This is like driving while watching your car radio. It leads to disasters.

Next, have you ever bought a stock and watched it decline in price? Tell the truth now. I think we have all had this happen more than once. More telling, did you then decide that this stock that you bought was now a long term holding? Clearly, if your stock doesn't go up in the short term, then it either should be sold (as in admitting your mistake), added to (I'm right and the stock market is wrong. This is a gutsy move and can lead to larger losses or terrific gains.) Or more usually, we just switch the criteria we are using to make investment decisions from near term to long term to put off having to admit we are, at least in the interim, wrong about this stock.

What you need is the right tools for portfolio management. Unfortunately the right tools are expensive. What you need are computer software systems that track all your investments and report to you your compounded rate of return against some of the major market averages, like the Standard & Poors 500 stock average. In this fashion you can easily tell if your decisions are working or not working. Some systems will even tell you how the results were produced, stock by stock and fund by fund. In this fashion you can tell which decisions are boosting your returns and which are hurting your returns.

So, if you have investments and you don't have a portfolio manager (please note that mutual funds are not a substitute for your own portfolio manager), you are on your own as they say. Brokers aren't portfolio managers, by the way, because they do not provide you with the tools to manage your investments. They only facilitate the transactions for a fee. If you have substantial holdings of $100,000 or more, you might consider retaining a portfolio manager to make sure your money is working for you and not working on you.

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