Risk

Do Our Biases Affect Our Financial Choices?

Presented by Beacon Financial Group

Even the most seasoned investors are prone to their influence.

Investors are routinely warned about allowing their emotions to influence their decisions.  They are less routinely cautioned about letting their preconceptions and biases color their financial choices.

 

In a battle between the facts & our preconceptions, our preconceptions may win. If we acknowledge this tendency, we may be able to avoid some unexamined choices when it comes to personal finance; it may actually “pay” us to recognize our biases as we invest. Here are some common examples of bias creeping into our financial lives. 1

  

Valuing outcomes of investment decisions more than the quality of those decisions. An investor thinks, “I got a great return from that decision,” instead of thinking, “that was a good decision because ______.”

 

How many investment decisions do we make that have a predictable outcome? Hardly any. In retrospect, it is all too easy to prize the gain from a decision over the wisdom of the decision, and to, therefore, believe that the decisions with the best outcomes were in fact the best decisions (not necessarily true). 

Valuing facts we “know” & “see” more than “abstract” facts. Information that seems abstract may seem less valid or valuable than information that relates to personal experience. This is true when we consider different types of investments, the state of the markets, and the health of the economy.

 

Valuing the latest information most. In the investment world, the latest news is often more valuable than old news, but when the latest news is consistently good (or consistently bad), memories of previous market climate(s) may become too distant. If we are not careful, our minds may subconsciously dismiss the eventual emergence of the next bear (or bull) market. 

     

Being overconfident. The more experienced we are at investing, the more confidence we have about our investment choices. When the market is going up and a clear majority of our investment choices work out well, this reinforces our confidence, sometimes to a point where we may start to feel we can do little wrong, thanks to the state of the market, our investing acumen, or both. This can be dangerous.

 

The herd mentality. You know how this goes: if everyone is doing something, they must be doing it for sound and logical reasons. The herd mentality is what leads many investors to buy high (and sell low). It can also promote panic selling. Above all, it encourages market timing – and when investors try to time the market, they frequently realize subpar returns.

       

Sometimes, asking ourselves what our certainty is based on and what it reflects about ourselves can be a helpful and informative step. Examining our preconceptions may help us as we invest.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 - forbes.com/sites/theyec/2018/12/14/three-psychological-biases-that-prevent-effective-financial-management [12/14/18]



Investing Means Tolerating Some Risk

That truth must always be recognized.

When financial markets have a bad day, week, or month, discomforting headlines and data can

swiftly communicate a message to retirees and retirement savers alike: equity investments are

risky things, and Wall Street is a risky place.

All true. If you want to accumulate significant retirement savings or try and grow your wealth

through the opportunities in the markets, this is a reality you cannot avoid.

Regularly, your investments contend with assorted market risks. They never go away. At

times, they may seem dangerous to your net worth or your retirement savings, so much so that

you think about getting out of equities entirely.

If you are having such thoughts, think about this: in the big picture, the real danger to your

retirement could be being too risk averse.

Is it possible to hold too much in cash? Yes. Some pre-retirees do. (Even some retirees, in fact.)

Some have six-figure savings accounts, built up since the Great Recession and the last bear

market. They may feel this is a prudent move with the thought that a dollar will always be

worth a dollar in America, and that the money is out of the market and backed by deposit

insurance.

This is all well and good, but the problem is the earning potential. Even with interest rates

rising, many high-balance savings accounts are currently yielding less than 0.5% a year. The

latest inflation data shows consumer prices advancing 2.3% a year. The data suggests the

money in the bank is not outrunning inflation and may likely lose purchasing power over

time.

Consider some of the recent yearly advances of the S&P 500. In 2016, it gained 9.54%; in

2017, it gained 19.42%. Those were the price returns; the 2016 and 2017 total returns (with

dividends reinvested) were a respective 11.96% and 21.83%.

Yes, the broad benchmark for U.S. equities has bad years as well. Historically, it has had about

one negative year for every three positive years. Looking through relatively recent historical

windows, the positives have mostly outweighed the negatives for investors. From 1973-2016,

for example, the S&P gained an average of 11.69% per year. (The last 3-year losing streak the

S&P had was in 2000-02.)

Your portfolio may not return as well as the S&P does in a given year, but when equities rally,

your household may see its invested assets grow noticeably. When you bring in equity

investment account factors like compounding and tax deferral, the growth of those invested

assets over decades may dwarf the growth that could result from mere checking or savings

account interest.

At some point, putting too little into investments and too much in the bank may become a risk

– a risk to your retirement savings potential. At today’s interest rates, the money you are

saving may end up growing faster if it is invested in some vehicle offering potentially greater

reward and comparatively greater degrees of risk to tolerate.

Having an emergency fund is good. You can dip into that liquid pool of cash to address

sudden financial issues that pose risks to your financial equilibrium in the present.

Having a retirement fund is even better. When you have one of those, you may confidently

address the risk of outliving your money in the future.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This

information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee

of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is

advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and

may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment

or insurance product or service, and should not be relied upon as such. All indices are unmanaged and cannot be invested into directly.

Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any

investment.

«RepresentativeDisclosure»

Citations.

1 - valuepenguin.com/average-savings-account-interest-rates [10/4/18]

2 - investing.com/economic-calendar/ [10/11/18]

3 - money.cnn.com/data/markets/sandp/ [10/11/18]

4 - ycharts.com/indicators/sandp_500_total_return_annual [10/11/18]

5 - thebalance.com/stock-market-returns-by-year-2388543 [6/23/18]