The 5 steps to smarter financial decisions every investor needs to hear

Hands taking notes on a notepad

How do we decide how to decide?

It’s a little meta, but the answer is crucial – especially when it comes to our finances.

Without consistency, we might as well rewrite the script every time we try to make smart decisions. Some people do, and it’s exhausting.

That’s where systems come in.

Solid systems eliminate guesswork and replace it with principles, procedures, and proven strategies. This helps avoid things like decision fatigue and emotional reactions, both of which can lead to financial decisions you’re likely to regret.

If the thought of building an entire personal system is overwhelming, you’re not alone. In a 2019 survey, Investopedia surveyed more than 1,400 affluent millennials, finding that less than half felt confident about investing and retirement planning. “In fact,” the survey noted, “only 37% of affluent millennials feel knowledgeable about investing at all.”

Even those that did report feeling knowledgeable about investing may not have a system in place to keep themselves on track.

But when it comes to systems, there’s no need to reinvent the wheel. Think about it: many smart people use systems. Sometimes, they just have a different name.

For example, pro athletes make the most of their playbooks and their gear. And many successful entrepreneurs start every day with a morning routine that includes to-dos, meditation, and exercise.

When it comes to your finances, your system can be just as easy to build. Here are five steps to making smart financial decisions by laying the groundwork for a grounded system:

  1. Identify your important financial decisions
  2. Identify your risk tolerance
  3. Leverage the right digital tools
  4. Study the systems of great investors
  5. Revisit your system over time

1. Identify your important financial decisions

When it comes to investing, your system should account for the smart financial decisions you hope to make now, in the near term and the longer term.

There’s no need to overwhelm yourself with everything at once. You can employ a principle championed by the late Stephen Covey, author of the classic business book The 7 Habits of Highly Effective People: “Begin with the end in mind.”

Start with one goal and build as you go. Here are some examples to consider:

Building your wealth

How much do you hope to make, either in a dollar amount or as a percentage return? What amount of your income (no matter how small) can you devote to this?

Saving for a home

What price range do you want to stay within? What percentage deposit do you want to use as a down payment?


How much will you need when you retire? Does your company offer a “match,” which essentially means they will provide you with money equal to the percentage of your paycheck you invest?

Each investing decision should map towards the answers to the questions and goals above. Just as your smartphone’s map app is useless without a destination, your system benefits you most when you define the goal for yourself.

The more specific, the better.

2. Identify your risk tolerance.

Random behavior results in random outcomes.

When you set a financial goal, you must define how much risk you are willing to take. This helps you build a system that keeps you in check with that risk tolerance.

For example, if you identify that you have a lower risk tolerance, you may not want to go all in on a volatile tech stock. In this case, you may want to diversify your portfolio to spread the risk.

When it comes to rebalancing or editing that Pie, you can go back to that guide you set for yourself: “I have a low risk tolerance. Unless it’s changed, my stock choices should match that.”

3. Leverage the right digital tools

What will help you make better financial decisions?

Automation and consolidation.

It’s nearly impossible to keep track of a dozen financial apps. And it’s even more time consuming to move money between them.

Something like automated scheduling can take the stress out of remembering to allocate cash and decide each time when and how it gets done.

The right tool will save you time and keep you focused, but it won’t take away your control.

4. Study the systems of great investors

One of the simplest financial systems is called buy-and-hold.

The idea is as simple as the name: Buy a stock and hold it. Investors who make frequent, repeated entries and exits into the market open the door to a host of problems.

Don’t take our word for it, this sentiment is shared by everyone from analysts to market researchers. In an article for Forbes, Senior Contributor Simon Moore writes:

They [Brazilian researchers] found that 97% of day traders end up losing money as a year approaches. In fact, a similar paper examining the fortunes of day traders in Taiwan, found that only 1% made money. Other researchers have come to a similar conclusion, researchers in the U.S. found that about a third of U.S. day traders between 1992 and 2006 had some level of profitability after costs. That’s a better outcome, but the concern is that those results pre-date the broad adoption of algorithmic trading.

 In periods of scary headlines, many investors stampede to sell a stock, often at its lowest point.

Advocates of buy-and-hold would maintain that this is the worst time to sell—just hold on to your shares and if needed, adjust your time horizon from days, weeks, or months to years. In fact, it may even be a good time to buy if investor panic is hurting an otherwise solid investment.

You might wonder what kind of investor uses a system like that. Good question.

The biggest fan of buy-and-hold is none other than a certain billionaire and legendary investor named Warren Buffett. Once asked what his favorite holding period for a stock, he replied “forever.”

5. Revisit your system over time

A great system should not stand still. Markets change and investments come and go, so your system needs to be flexible to keep up.

Think about how you tweak any aspect of your life, from how you eat and work out to the maintenance your car needs. How you invest should be the same.  

Review your financial system at least once a year. How can you increase your knowledge of how markets work? How do your investment accounts, spending, and debt work together? How can you spend more time refining your system and less time in the day to day tasks?

Like any endeavor that requires patience and learning as you go (building a portfolio, a career or a family) building a system does not require you to know all the answers, only that you start.

If that’s been a stumbling block, we recommend you check out our posts here and here on the power of Tiny Habits.

Better systems, solid systems, lead to smarter financial decisions. Here’s hoping after reading this, you’ve made the decision to get started.  

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