Updated: October 6, 2020
It’s common for people to ask me what’s the best investment today. I find this to be a difficult question because I believe there’s no good way to give a straightforward answer to this inquiry.
There are thousands of investments out there. Each one has a level of risk, potential return, and other important features that makes it almost impossible to do an effective comparison to determine which is the best.
More importantly, I believe that the best investment really depends on the financial capacity and the investment goals of a person.
This means the best investment is different for someone who has P100,000 and for someone else who has 1 million.
Similarly, the best investment would not be the same for someone who wants to save for retirement and for another person hoping to buy a house within the next 5 years.
The Psychology of Decision-Making
Psychologists have found that people can generally be categorized into two types when it comes to decision-making.
First, one can be a MAXIMIZER. They’re the ones who choose the option that gives them the maximum benefit. And second, the SATISFICER. They’re the ones who choose the option that meets a minimum set of criteria.
The latter term is a portmanteau of the words ‘satisfy’ and ‘suffice’. It was first proposed by Nobel Prize-winning economist, Herbert A. Simon in 1956.
To illustrate the difference between the two, imagine that you’re buying a mobile phone and these are your choices:
- A basic smartphone worth P10,000 that has a good camera.
- A mid-level smartphone worth P20,000 that has an excellent camera.
- A premium smartphone worth P25,000 that has an excellent camera and HD video recording capabilities.
A maximizer would definitely want to buy the third one. If he has a P25,000 budget, then he’d have no second thoughts of getting the premium smartphone.
A satisficer, on the other hand, would choose based on what he needs. So if all he needs is just an excellent camera, then he’d buy the mid-level smartphone even if his budget is P25,000 and could actually afford the premium model.
Now here’s an interesting fact that’s been found in several studies in human behavior:
Maximizers usually achieve better life outcomes, but would always feel they could be missing out on something better. Meanwhile, satisficers are more likely to feel happy and have fewer regrets, despite not having the most of what life can give.
How to make better investing decision
The concept of being a maximizer and a satisficer is useful in managing how we spend, as illustrated by the smartphone example. As a satisficer, you won’t be swayed easily and spend more on non-essential reasons.
But furthermore, it is a great mindset to have when it comes to choosing the best investment.
As mentioned earlier, the best investment really depends on personal factors. For a satisficer, these factors become the criteria with which they measure if an investment is good or not.
Particularly, you would first define the following prior to investing:
- What is my financial goal? What am I saving and investing money for?
- When do I want to achieve this goal? What is my target date?
- How much do I need for this goal? What is my target amount?
One those have been clearly defined, you could then ask the following questions when you’re trying to decide if an investment is good or not:
- Can I afford this investment? Do I have enough money and cashflow to open and sustain this investment?
- Can this investment give my target amount on my target date? Can it help me reach my specific financial goal?
- Are the risks of this investment acceptable to me? Will I be comfortable with facing those risks?
If you can answer “Yes” to all the questions above, then your minimum and essential criteria have been satisfied and thus, this investment should suffice.
There’s no need to look for other investments because you’ve already found the best investment for you. And the only reason why you would look further is if you’re already trying to diversify your portfolio.
Again, there are thousands of investments out there. Each one with different levels of risk, potential return, and other features.
It would be stressful, and sometimes a waste of time already, to try to compare every investment out there that you could find.
In other words, don’t be a maximizer. Instead, be a satisficer when it comes to choosing investments. Because that’s the most efficient way to choose the best investment.