September 24, 2021
Friday AM

(SitNews) Ketchikan, Alaska - Your skill at managing money relies largely on your brain’s ability to get information and make rational decisions. The problem, however, is that our brains are not rational. Instead, our brains are emotional, but do have the power to inform, which we assume makes us rational. That assumption is often false. It can and does get in the way of us actually making those rational decisions, especially about money, and this is how we get into trouble with money.

Israeli psychologists Daniel Kahneman and Amos Tversky are recognized in the world of finance as the first professionals in the field of behavioral finance to speak and teach in public about how irrational our brains are on the subject of money. They developed a body of research that since the mid 1970’s has focused on why we make bad financial decisions and how to recognize them, in hopes of correcting them. Below is a quiz you can take to get a better idea of your own money style and how you can avoid making the most common investment mistakes.

1. Your investment portfolio is heavily invested in a stock that has declined in price by 30% from the price that you paid for it when you bought it. Which of the following actions should you take?

A. Hold the stock until it gets back up to the price you paid for it, then sell it.
B. Research the stock as if you were going to buy it for the first time and make a choice to hold/buy/sell based on your research.

2. Your advisor suggests new stocks or mutual funds to replace underperforming stocks and funds that you have had for years. What is your response to her suggestions?

A. You decide to keep the underperforming stocks/funds she suggests you sell because you have had them for many years.
B. You discuss the data on these stocks with your advisor and decide to take her advice.

3. Your portfolio is made up of tech funds, health care funds, financial funds and bond funds. Your advisor suggests reducing the size of your investment in the tech fund sector because she believes it has become overpriced and subject to a decline in the near future. What is your reaction to this advice?

A. You meet with your advisor to consider other sectors in which to diversify.
B. You meet with your advisor and decide to continue with the tech fund sector because you believe that tech is the future.

4. The stock market goes into a major correction, causing stock prices to drop dramatically in prices, so your portfolio, which holds a large cash position, suffers a major reduction in value. What is the best way to handle this?

A. You sell out and minimize your losses.
B. You buy more of your funds that lost the most value.
C. You buy more of your funds that lost the least value.
D. You do nothing.

5. Your investments gain an average of 15% per year for 2 years, then drop by 20% in year 3 and then rises by 25% in year 4. What is the better of the following two choices to deal with the volatility of these market ups and downs?

A. You get out of the market and put all of your invested dollars in cash, to preserve the value of what you have already accumulated.
B. The market is sometimes volatile so you stick with the plan that you have in place rather than make any changes.

6. A financial broadcaster interviews a fund manager who promotes his fund, that he says has a great future and should be part of the portfolio of a smart investor willing to take some risk. What is your reaction to this story about this stock?

A. You are interested in the potential of this fund and decide to take a chance on it with about 5% of your portfolio money.
B. You do not buy any of this stock because you believe that a stock should be valued based on more than its potential to perform well in the future.
C. You buy some of this stock because you believe that this is a trusted news source for identifying hot new stocks.

7. You inherit a lot of cash money. What do you do now?
a. You buy stocks that your friends have told you have made the most money for them.

b. You pay off all of your debts and buy bonds with the remaining balance.
c. You set up a diversified portfolio of funds in different categories and risk levels because you believe that it is the safest way to invest.
d. You buy a new house and put the remaining cash in the bank.

8. You have a portfolio of 10 different mutual funds. One of them has risen in value, based on the current share price, by 200% while the rest have risen 50% on average. Which of the following do you do?

A. Sell the fund that has risen 200% in order to realize the gains.
B. Sell half of the fund and buy another fund in a different category with the gains.
C. Hold the fund because it is your best performer and will continue to outperform the other funds.

9. The stock market suffers a major correction. What is the best course of action to take in order deal with a crash like this?

A. Make no changes in your portfolio because your goals have not changed.
B. Make significant changes in your portfolio to guard against future stock market corrections and crashes.

10. Your uncle leaves you $150,000 cash in his will. Which of these actions is the best choice of these listed below, as to what to do with this inheritance?

A. Add it to your IRA in order to avoid paying tax on it.
B. Pay off the mortgage on your house.
C. Pay off your credit cards and invest the remainder.
D. Purchase a guaranteed annuity from your insurance agent.

Now that you have completed the quiz, make a note of your answers, because they will help you to understand what drives how you handle money and whether or not that is working for you. I will provide the answers in my follow-up to this column. Your answers are clues to how you make financial decisions, invest and what skills you have or need to get in order to do a better job of money. See you for answers in the next column!

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