Successful Investors Use Their Heads

AMA6-14-14It’s the stuff of happy endings everywhere: a gut feeling a tug at the heart or an intuition opens doors to just the right thing. That can be true in money matters, too – but financial experts say that the best investing outcomes are those driven by cool, collected logic: objective, not subjective, thinking.

Subjective decision-making is the kind that’s ruled by feelings rather than facts and figures. And there’s a place for that in many an investing endeavor, particularly real estate. When you’re choosing a place to make your home for at least a few years, your feelings can – and maybe should – play a role. If price and other “objective” considerations are equal, choosing a house that reminds you of your childhood home may make sense.

But when it comes to investment properties bought with the intent to generate income, decision making, has to be objective. The prettiest property in town doesn’t mean much if it costs too much and can’t generate income from rents. Investors need to consider cold hard facts and figures – a process that Jason Hartman sums us as Three Dimensional Real Estate Investing: price, financing and cash flow.

Those three dimensions allow an investor to take a clear look at the key parameters that indicate investing success. And they also reveal the ways emotions can derail the process:

Emotions can enter into the prices of buying a property. It’s easy to jump at a property just because it looks like a bargain, or sellers say it won’t last long. Those kinds of feelings can make price the sole determining factor of whether a property makes sense. But the objective investor also considers:

Financing an investment can get derailed by impulses and personal interactions too. Again, emotions ranging from comfort (there’s an easy way to handle the process with friendly lenders) to fear and aversion can overrule more important factors such as what terms and rates work best for individual investing goals. Investors making impulsive decisions can end up paying more or getting less.

Not much else matters if the property doesn’t produce the desired income, or cash flow. Calculating the Rent to Value ratio and other factors gives a clear picture of the cash flow potential of a given property – and those figures need to guide decisions.

In other aspects of investing, too, the head has to prevail over the heart. Choosing advisers not for expertise, but for personality, or skimping on learning about the investing process because it’s boring, won’t get an investor very far on the road to building wealth.

How to keep decisions objective – and put those pesky feelings in their place? The key, say life coaches and financial experts, lies in mindfulness: pay attention to how you’re feeling and what seems to be pulling you to or away from a given option, Have clear goals, too, and know what steps you need to take to achieve them – a way to keep the head, not the heart, firmly in control of your investing success.  (Top image:Flickr/KevFowler)

Read more from The American Monetary Association:

The US: The Last Superpower Standing?

5 Investing Mistakes That Cost You Money

The American Monetary Association Team

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