ABCs of Behavioral Biases (A to F)
Four self-inflicted biases that knock a number of investors off-course are anchoring, blind spot, confirmation and familiarity bias.
Ever heard of the 80/20 Rule? It suggests 80% of an outcome is often the result of just 20% of the effort you put into it.
This does not always work. Sometimes, it is worth going the extra mile. But often, by prioritizing the 20% of your efforts that makes the biggest splash, you can reduce excess commotion. In that spirit, here are four financial best practices that pack a lot of value per “pound.”
You could do far worse than to invest according to a sentiment attributed to Woody Allen:
“80% of success is showing up.”
Going back to 1926 and after adjusting for inflation, U.S. stocks have delivered about 7.3% annualized returns to investors who have simply been there, earning what the markets have to offer over the long haul. Those who instead fixate on dodging in and out of hot and cold markets are expected to reduce, rather than improve their end returns. That is because, when markets recover from a downturn, they often more than make up for the stumble quickly, dramatically, and without warning. Instead of chasing trends, simply stay invested over time.
Asset allocation is about investing in appropriate percentages of security types, or asset classes, based on their risk/return “personality.” For example, given your financial goals and risk tolerances, what ratio of stocks versus bonds should you hold? What percentage of small value stocks versus large growth? How much domestic and how much international?
Both practical and academic analyses have found that asset allocation is responsible for a great deal of the return variability across and among different portfolios. So, to build an efficient portfolio, we advise paying the most attention to your overall asset allocation, rather than fussing over particular securities. And by the way, once you have gotten a personalized asset allocation in place, the only reason to change it is if you change. If you are tempted to alter your allocations based on current market conditions, circle back to our first point.
Also in 80/20 Rule fashion, an ounce of financial planning can alleviate pounds of doubt. It connects your resources with your values and priorities. It is your touchstone when uncertainty eats away at your resolve. It guides how and why you are investing to begin with.
Here is some good, 80/20 news. Your plan need not be elaborate or time-consuming to be effective. In The One-Page Financial Plan, author Carl Richards describes:
“Your one-page plan simply represents the three to four things that are the most important to you: some action items that need to get done along with a reminder of why you’re doing them.”
If you would like to do more, great. But even a one-page plan will give you a huge head start. Write it down, as Richards describes. When in doubt, read what you have written. Is it still “you”? If so, your work is done. Stick to plan. If not, consider what has changed and update your plan accordingly. It can be that easy.
Even the best-laid financial plans can be thwarted if your assets are exposed to financial scams and identity theft slams. Fortunately, there is a lot you can do to secure what you most easily can. We have even written a handy quick-reference guide on that.
If we were to pick one practical, but often overlooked, punch that delivers among the biggest blows to identity theft (at least here in the U.S.), it is the ability to freeze your credit reports.
Freezing each of your accounts with the three major credit bureaus (Equifax, Experian, and TransUnion) is like locking the doors to your home or vehicles. It creates a few extra steps for you, as you will need to temporarily lift the freeze when you wish to take out an occasional loan. But it costs nothing to set up and manage. And if an identity thief does get ahold of your information, it should stop them cold if they try taking out lines of credit in your name. This strikes us as an 80/20 trade-off well worth making.
Properly applied, the 80/20 Rule can help minimize the time and energy you have to put into maximizing your financial well-being. Whether you are saving for retirement, funding your kids’ college education, preparing for a wealth transfer, applying for insurance, or otherwise managing your hard-earned wealth, we can help you identify and execute these and other actions that matter the most, so you can get back to the rest of your life. Want to learn more? Give us a call today at (781) 291-3001. Consider it part of the 20% of your efforts that should take you far.
FREE FINANCIAL ASSESSMENT
With all the uncertainty and volatility in today’s economy, the time is now to take a thorough look at your finances. To accurately plan for your financial future, you must first know where you currently stand. For these reasons, our Success Team at Impact Advisors Group is offering a free financial assessment for both individuals and business owners. Request yours today!
This post was prepared and first distributed by Wendy J. Cook.
Four self-inflicted biases that knock a number of investors off-course are anchoring, blind spot, confirmation and familiarity bias.
Legendary economist Benjamin Graham once stated that ‘your own behavioral biases are often the greatest threat to your financial well-being.’
If you file tax returns separately AND are separated from your partner, colleges consider you a two-household family.
Take some time to map out how to pay for all four years before your student gets the bill for freshman year.