Perception and Reality in Investing

It goes without saying that our senses and perceptions can sometimes deceive us. We have all seen how a pencil can look bent while propped inside a glass of water or how a cleverly designed optical illusion (such as the rotating circles illusion below, found at http://www.richrock.com/illusion.html) can create the appearance of motion when there is none.

Rotating Circles Optical Illusion


The same dichotomy between perception and reality is present in the world of investing. Sometimes an investment, such as the recent Bear Stearns (NYSE: BSC) fiasco, can seem to be sound while the reality is that there are major problems below the surface. By contrast, sometimes there are no surface indications that an investment will take off in the future, and some lucky soul will make a fortune from it.

With this veil of perception surrounding our investments, how can one be certain that one is making the right choice in one's investments?

One answer to this question would be to have a healthy dose of financial skepticism. Learning not to trust your initial perceptions about what investments would be sound, and hence expecting there to be some hidden factors behind the scenes, will lead to greater prudence in one's investing habits. One should not be too skeptical, however, since excessive skepticism will prevent one from taking any action and turning one's investing plan into a reality. But a healthy dose of skepticism is appropriate, since if something looks too good to be true, it probably is.

Another answer would be to do adequate research before jumping in to an investment. This research can be simple or complex depending on the nature of the investments you are pursuing. If you are investing in an individual stock, such as my recent purchase of 20 shares of Citigroup (NYSE: C), then you ought to familiarize oneself with the ins and outs of that company's financial situation. Investing in index funds is much simpler and requires far less research, but one should still take the time to research a financial plan that one can implement in one's individual situation. Adequate research and planning can make the difference between retiring rich and trading your capital into oblivion.

In conclusion, do not be too quick to trust your financial perceptions. Unless those perceptions are grounded in reality and in adequate research and planning, one's perceptions are just as likely to be incorrect as to be correct. Don't let your investments, and your financial future, be made of smoke and mirrors, but use prudence and wisdom to keep yourself on the straight and narrow.

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